As filed with the Securities and Exchange Commission on May 10, 2000
Registration No. 333-
Subject to Completion
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
MGC COMMUNICATIONS INC.
(Exact name of Registrant as specified in its charter)
Nevada 4813 88-0360042
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation Classification Code Number) Identification
or Organization) Number)
171 Sully's Trail, Suite 202
Pittsford, NY 14534
(716) 218-6550
(Address, including zip code, and
telephone number, including
area code, of Registrant's
principal executive
offices)
------------------------------
Kent F. Heyman, Esq.
171 Sully's Trail, Suite 202
Pittsford, NY 14534
(716) 218-6550
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
Copies to:
Peter Lyons, Esq. Kenneth J. Baronsky, Esq.
Shearman &Sterling Milbank, Tweed, Hadley & McCloy
599 Lexington Avenue 601 S. Figueroa Street, 30th Floor
New York, NY 10022 Los Angeles, CA 90017
(212) 848-4000 (213) 892-4000
Approximate date of commencement of proposed sale to the public: As promptly as
practicable after this Registration Statement becomes effective and upon the
effective time of the proposed Merger as described herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [_]
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Proposed maximum Proposed maximum
Title of each class of securities Amount to offering price per aggregate offering Amount of
to be registered be registered (1) security price(2) registration fee (3)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $0.01 per share 1,463,727 Not Applicable $24,089.23 $6.36
==================================================================================================================================
</TABLE>
(1) Based on the maximum number of shares of Mpower Communications Corp. common
stock that may be required to be issued in connection with the merger,
calculated as the product of (a) 72,390,027, which is the sum of (i) the
number of shares of Primary Network Holdings, Inc. common stock, par value $.001
per share outstanding on April 30, 2000, (ii) the number of shares of Primary
Network Holdings, Inc. common stock issuable pursuant to outstanding stock
options through the date the merger is expected to be consummated, (iii) the
number of shares of Mpower common stock issuable to holders of Primary Network
12% Senior Subordinated Discount Notes, due 2006 and (iv) the number of shares
of Primary Network Holdings, Inc. common stock otherwise expected to be issued
prior to the date the merger is expected to be consummated and (b) an exchange
ratio of 0.02022 of a share of Mpower Communications Corp. common stock for each
share of Primary Network Holdings, Inc. common stock.
(2) Estimated solely for the purpose of calculating the registration fee
required by Section 6(b) of the Securities Act of 1933, as amended, and computed
pursuant to Rule 457(f)(2) thereunder on the basis of the book value of the
Primary Network common stock to be exchanged in the merger.
(3) Pursuant to Rule 457(f)(2) under the Securities Act, the registration fee
is $6.36.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
================================================================================
<PAGE>
LETTER TO PRIMARY NETWORK STOCKHOLDERS
PROXY STATEMENT/PROSPECTUS DATED _____, 2000
______, 2000
Dear Fellow Stockholders:
You are cordially invited to attend a special meeting of the
stockholders of Primary Network Holdings, Inc., which is referred to as Primary
Network, which we will hold at _____ a.m., local time, on ____, 2000, at
___________.
At the special meeting, we will ask you to approve the merger of
Primary Network with Mpower Communications Corp. (a/k/a MGC Communications,
Inc.), which is referred to as Mpower. Mpower common stock is quoted on NASDAQ
under the trading symbol "MPWR." On _______, 2000, Mpower common stock closed at
$___ per share. After the proposed merger, Primary Network will be a wholly
owned subsidiary of Mpower, and you will be a stockholder of Mpower. In the
merger, each outstanding share of common stock and each outstanding share of
preferred stock of Primary Network will be converted into 0.02022 shares of
Mpower common stock. For any resulting fractional share, a shareholder will
receive cash in an amount equal to the market value of the fractional share.
A total of 1,350,000 shares of Mpower common stock will be issued to
Primary Network stockholders in connection with the merger. After the merger,
the current Primary Network common and preferred stockholders will own
approximately 3.1% and the current Mpower common stockholders will own
approximately 96.9% of the outstanding shares of common stock of the combined
company. After the completion of the merger, Mpower intends to launch an
exchange offer where holders of the Primary Network 12% Senior Subordinated
Discount Notes will be able to exchange their Primary Network notes for Mpower
notes. Should a holder of these Primary Network notes not wish to exchange them
for Mpower notes, Mpower will offer to repurchase the Primary Network notes in
accordance with their terms.
Your board of directors has determined that the merger is consistent
with, and advances, the long-term business strategy of Primary Network and
recommends that you vote in favor of the merger at the special meeting. The
merger cannot be completed unless a majority of the holders of voting stock of
Primary Network vote to approve it. Brian Matthews, Carol Matthews, Charles
Wiegert, Welton Brison, Tom Hesterman, Richard Phillips, John Alden, EC Primary
LLC, Quantum Emerging Growth Partners, C.V. and TGV Partners, which together
hold approximately 73% of Primary Network common stock, have agreed to vote in
favor of the merger and have granted irrevocable proxies to Mpower to enforce
such voting agreement.
The attached Proxy Statement/Prospectus provides you with detailed
information about Mpower and the proposed merger. You should read this document,
particularly the
<PAGE>
section describing risk factors relating to the merger. After careful
consideration, your board of directors has by unanimous vote of all directors
participating approved the merger and determined to recommend that you vote in
favor of the merger. We look forward to the successful combination of Primary
Network and Mpower and to your continued support as a stockholder of the
combined company.
For a discussion of the risk factors which you should consider in
evaluating the merger, see "Risk Factors" beginning on page 16.
FOR YOUR VOTE TO BE COUNTED, IT IS IMPORTANT THAT YOU SIGN AND RETURN
THE PROXY CARD CONTAINED HEREIN.
Sincerely,
/s/ Brian Matthews
Brian Matthews
Chairman of the Board of Directors
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE MPOWER COMMON STOCK TO BE ISSUED IN THE MERGER OR
DETERMINED WHETHER THIS PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
This Proxy Statement/Prospectus is dated ______, 2000 and is first
being mailed to stockholders on or about _____, 2000.
<PAGE>
PRIMARY NETWORK HOLDINGS, INC.
11756 BORMAN DRIVE
ST. LOUIS, MISSOURI 63146
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To the stockholders of Primary Network Holdings, Inc:
A special meeting of the holders of common stock of Primary Network
Holdings, Inc., which is referred to as Primary Network, will be held at ____
a.m. local time, on ________, 2000, at __________________________, to consider
and vote on a proposal to approve an agreement and plan of merger dated as of
April 17, 2000 among Primary Network Holdings, Inc., Mpower Communications Corp.
(a/k/a MGC Communications, Inc.), which is referred to as Mpower, and Mpower
Merger Sub, Inc., a wholly owned subsidiary of Mpower, and to approve the merger
and other transactions described in the merger agreement.
The only purpose of this meeting is to discuss and vote on whether to
authorize the merger of Primary Network with Mpower. We will transact no other
business at the special meeting, except for business properly brought before the
special meeting or any adjournment or postponement of the special meeting by the
Primary Network board of directors.
Your board of directors has determined that the merger is consistent
with, and advances, the long-term business strategy of Primary Network and
recommends that you vote in favor of the merger at the special meeting. The
merger cannot be completed unless a majority of the stockholders of Primary
Network vote to approve it. Brian Matthews, Carol Matthews, Charles Wiegart,
Welton Brison, Tom Hesterman, Richard Phillips, John Alden, EC Primary LLC,
Quantum Emerging Growth Partners, C.V. and TGV Partners, together holders of
approximately 73% of the shares of Primary Network common stock outstanding,
have agreed to vote in favor of the merger and have granted irrevocable proxies
to Mpower to enforce such voting agreement.
The close of business on _______, 2000 is the record date for
determining which holders of common stock are entitled to vote at the meeting
and at any adjournment or postponement of the meeting. A list of stockholders
entitled to vote at the meeting will be available for your examination at
Primary Network's headquarters for a period of ten days before the meeting
during regular business hours.
PLEASE READ THE ACCOMPANYING PROXY STATEMENT/PROSPECTUS AND THE MERGER
AGREEMENT ATTACHED AS APPENDIX I FOR INFORMATION RELATING TO PRIMARY NETWORK,
MPOWER AND THE TERMS AND CONDITIONS OF THE MERGER, AS WELL AS APPENDIX II
SETTING FORTH YOUR RIGHTS TO DISSENT FROM THE MERGER. OTHER IMPORTANT
INFORMATION IS INCORPORATED BY
<PAGE>
REFERENCE FROM OTHER DOCUMENTS. IN ORDER TO OBTAIN A COPY OF THE DOCUMENTS
CONTAINING INFORMATION INCORPORATED BY REFERENCE, YOU MUST REQUEST THE
INFORMATION NO LATER THAN FIVE BUSINESS DAYS BEFORE THE DATE OF THE STOCKHOLDER
MEETING. PLEASE REVIEW ALL THESE MATERIALS BEFORE COMPLETING THE ENCLOSED PROXY
CARD.
By order of the Board of Directors,
/s/ Brian Matthews
Brian Matthews
Chairman of the Board of Directors
_____, 2000
To assure your representation at the special meeting, please complete,
sign, date and return the enclosed proxy card promptly in the enclosed
self-addressed, stamped envelope or via facsimile to (314) 692-3587, attn. Amy
Schroeder. In the event that you deliver the proxy card via facsimile, please
call Amy Schroeder prior to sending at (314) 214-0075. The delivery of the proxy
will not affect your right to attend the meeting, or, if you choose to revoke
the proxy, your right to vote in person. Please do not send in your stock
certificates with your proxy card.
<PAGE>
TABLE OF CONTENTS
Page
QUESTIONS AND ANSWERS ABOUT THE MERGER.........................................i
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS...................iii
SUMMARY........................................................................1
SELECTED HISTORICAL FINANCIAL INFORMATION......................................8
Selected Historical Financial Information of Mpower...................8
Selected Historical Financial Information of Primary Network..........9
Unaudited Selected Pro Forma Condensed Combined Financial
Information.................................................10
COMPARATIVE PER SHARE DATA....................................................14
MARKET PRICE AND DIVIDEND INFORMATION.........................................15
RISK FACTORS..................................................................16
THE PRIMARY NETWORK SPECIAL MEETING...........................................29
Date, Time and Place.................................................29
Purposes of the Special Meeting......................................29
Recommendations of the Primary Network Board of Directors; Reasons
for the Merger..............................................29
Only Common Stockholders of Record as of the Record Date Are
Entitled to Vote............................................31
Votes Required for Approval..........................................31
Voting Your Shares and How Proxies Are Counted.......................32
Revoking Your Proxy..................................................32
Soliciting Proxies...................................................32
You Should Not Send Any Certificates Representing Primary Network
Common Stock with the Enclosed Proxy Card...................33
THE COMPANIES.................................................................34
Primary Network......................................................34
Primary Network Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................43
Mpower...............................................................57
THE MERGER....................................................................59
Background of the Merger.............................................59
Opinion of Houlihan Lokey............................................61
Interests of Certain Persons in the Merger...........................67
Accounting Treatment.................................................68
<PAGE>
Certain U.S. Federal Income Tax Consequences.........................68
Regulatory Approvals.................................................70
Restrictions on Sales of Mpower Common Stock by Affiliates of
Mpower and Primary Network..................................71
Stock Exchange Quotation.............................................71
Appraisal Rights.....................................................71
THE EXCHANGE OFFER AND THE LETTER AGREEMENT...................................74
Terms of the 13% Senior Notes and the Exchange Offer.................74
Restrictions on Sale.................................................75
THE MERGER AGREEMENT..........................................................76
Completion of the Merger.............................................76
Certain Representations and Warranties...............................76
Certain Covenants....................................................78
No Solicitation of Transactions......................................79
Conduct of the Business of Primary Network Prior to the Merger.......80
Stock Options and Employee Benefits..................................81
Indemnification and Insurance........................................81
Conditions to the Merger.............................................82
Termination of the Merger Agreement..................................84
Expenses and Termination Fees........................................85
Amendment............................................................85
THE SHAREHOLDERS AGREEMENT....................................................86
DESCRIPTION OF MPOWER CAPITAL STOCK...........................................88
General..............................................................88
Common Stock.........................................................88
Series B Convertible Preferred Stock.................................89
Series C Convertible Preferred Stock.................................91
Series B and C Preferred Stock Board Representation..................94
Series D Convertible Preferred Stock.................................94
COMPARISON OF STOCKHOLDER RIGHTS..............................................98
Board of Directors...................................................98
Stockholder Meetings.................................................99
Amendment to Organizational Documents...............................103
Capitalization......................................................104
Exculpation and Indemnification of Directors, Officers and
Employees........................................................104
COMPARISON OF CERTAIN STATUTORY PROVISIONS...................................107
Appraisal Rights....................................................107
Certain Business Combinations.......................................109
Control Share Acquisitions..........................................112
Constituency Provisions.............................................112
<PAGE>
LEGAL MATTERS................................................................114
EXPERTS......................................................................114
WHERE YOU CAN FIND MORE INFORMATION..........................................114
Annex A Agreement and Plan of Merger
Annex B Opinion of Houlihan Lokey
Annex C Shareholders Agreement among Mpower, Primary Network and the
entities listed on Schedule A thereto
Annex D Letter Agreement re Exchange Offer
Annex E Section 262 of the Delaware General Corporation Law
Annex F Certain Audited and Unaudited Financial Statements of Primary
Network
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q. Why is Primary Network proposing the transaction?
A. Primary Network believes that the transaction will be advantageous to
Primary Network stockholders because the addition of Primary Network to
Mpower will create a stronger and more competitive company with significant
potential for long-term growth, enhanced services, increased revenues and
reduced costs.
Q. What will Primary Network stockholders receive when the merger occurs?
A. A Primary Network shareholder will receive 0.02022 of a share of Mpower
common stock for each share of Primary Network common stock owned. For any
resulting fractional share, a shareholder will receive cash in an amount
equal to the market value of the fractional share. After the merger,
Primary Network stockholders will own approximately 3.1 percent of the
outstanding shares of Mpower common stock on a fully diluted basis.
For example: If a Primary Network shareholder owns 1,000 shares of
Primary Network common stock, he or she will be entitled to receive
after the merger 20 shares of Mpower common stock, plus a check for the
market value of twenty-two one-hundredths of a share.
Q. What are the U.S. federal income tax consequences of the merger?
A. In general, it is expected that Primary Network stockholders will not be
required to pay U.S. federal income tax as a result of exchanging Primary
Network shares for Mpower shares, except for taxes on any cash that is
received in lieu of fractional shares.
Q. What am I being asked to vote upon?
A. You are being asked to approve and adopt the merger agreement and the
merger.
Q. What should I do now?
A. You should carefully read and consider the information contained in this
Proxy Statement/Prospectus. You should then complete and sign your proxy
card and return it in the enclosed return envelope as soon as possible so
that your shares will be represented at your company's special meeting. You
may also vote in person at the special meeting.
Q. Should I send in my Primary Network stock certificate now?
A. No, you should not send in your stock certificate with your proxy. Promptly
after the merger is completed, Mpower will send written instructions to
former Primary Network stockholders describing the process for exchanging
their Primary Network stock certificates for Mpower stock certificates.
i
<PAGE>
Q. Are Primary Network stockholders entitled to appraisal rights?
A. Yes, Primary Network stockholders are entitled to appraisal rights. See
page 17 for details.
Q. When do the companies expect the merger to be completed?
A. We are working to complete the merger as quickly as possible. We plan to
complete the merger promptly after the shareholder meeting.
Q. What is the exchange offer?
A. Mpower will be launching an exchange offer after the completion of the
merger where holders of the Primary Network 12% Senior Subordinated
Discount Notes will be able to exchange their Primary Network notes for
Mpower notes. Should a holder of these Primary Network notes not wish to
exchange them for Mpower notes, Mpower will offer to repurchase the Primary
Network notes in accordance with their terms.
Q. How does the exchange offer affect me?
A. If you are a holder of only Primary Network common stock, you are not
affected by the exchange offer. If you are a holder of the Primary Network
notes, you will receive more information about the exchange offer after the
completion of the merger.
Q. Whom should I call if I have questions?
A. Primary Network stockholders who have questions about the merger may call
Mike Torrence, General Counsel of Primary Network, at (314) 692-3527.
ii
<PAGE>
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This Proxy Statement/Prospectus contains forward-looking statements
about the merger and about how Primary Network and Mpower may perform in the
future. You may find many of these statements in the following sections:
o "Risk Factors" beginning on page 16; and
o "The Merger-- Reasons for the Merger; Recommendation of the
Primary Network Board of Directors" beginning on page 29.
These statements may be identified by the use of forward-looking words
or phrases like "believe," "expect," "anticipate," "should," "planned," "may,"
"estimated" and "potential." These statements should be viewed with caution.
These forward-looking statements involve risks and uncertainties and
are based on Mpower's or Primary Network's current expectations. The Private
Securities Litigation Reform Act of 1995 provides a "safe harbor" for these
forward-looking statements. In order to comply with the terms of the safe
harbor, Mpower and Primary Network note that a variety of factors could cause
actual results and experience to differ materially from the anticipated results
or expectations expressed in these forward-looking statements. These factors
include, but are not limited to:
o revenues or income following the merger being lower than expected;
o increasing competitive forces in our markets;
o costs or difficulties related to the combination of our businesses
being greater than expected;
o governmental laws and regulations affecting the combined company;
o changes in general economic conditions or in political forces;
o changes in the securities markets;
o incurring delayed or unexpected costs;
o other risks and uncertainties described in "Risk Factors" and in
other sections of this Proxy Statement/Prospectus and in the
documents incorporated by reference into this document; and
o incorrectly analyzing the risks and forces the combined company
faces, or that the strategies developed to address them could be
unsuccessful.
iii
<PAGE>
You should not place a lot of weight on such forward-looking
statements. These statements speak only as of the date of this Proxy
Statement/Prospectus or, in the case of any document incorporated by reference,
as of the date of that document.
All subsequent written and oral forward-looking statements attributable
to Mpower or Primary Network or any person acting on our behalf are qualified by
the cautionary statements in this section. We will have no obligation to revise
or update these forward-looking statements.
iv
<PAGE>
SUMMARY
This Summary highlights selected information in this Proxy
Statement/Prospectus, and may not contain all of the information that is
important to you. To understand the merger fully and for a more complete legal
description of the terms of the merger, you should read carefully this entire
Proxy Statement/Prospectus and the documents to which we have referred you to.
See "Where You Can Find More Information" on page 114. The merger agreement is
attached as Annex I to this document. We encourage you to read the merger
agreement in its entirety, as it is the legal document that governs the merger.
The Companies (see p. 34)
Mpower Communications Corporation
171 Sully's Trail, Suite 202
Pittsford, NY 14534
(716) 218-6550
http://www.mpowercom.com
Mpower is a growing communications company currently offering Internet
access, voice over DSL, local dial tone, long distance and other voice and data
services primarily to small and medium sized business customers.
Mpower Merger Sub, Inc.
171 Sully's Trail, Suite 202
Pittsford, NY 14534
(716) 218-6550
Mpower Merger Sub, a wholly owned indirect subsidiary of Mpower, is a
Delaware corporation formed for use in the merger. This is the only business of
Mpower Merger Sub.
Primary Network Holdings, Inc.
11756 Borman Drive
St. Louis, MO 63146
(314) 214-0000
http://www.primary.net
Primary Network is an integrated communications provider offering data
and voice telecommunications services to both business and residential customers
in second and third tier markets in the Midwest. Primary Network's advanced
network is based on a new generation of DSL platforms and Asynchronous Transfer
Mode switches.
Primary Network currently offers its services in four metropolitan
areas: St. Louis, Missouri, Kansas City, Missouri, Springfield, Missouri and
Tulsa, Oklahoma.
1
<PAGE>
Primary Network's Reasons for the Merger (see page 29)
Your board of directors considered a number of factors in determining
to approve the merger and recommend it to you, including the following:
o The merger will provide Primary Network stockholders with an
ownership interest in a large telecommunications service provider.
Mpower is a large publicly traded telecommunications service
provider, with an equity capital base of approximately $449
million as of March 31, 2000 and a market capitalization of
approximately $1.957 billion as of April 28, 2000.
o The combined company will have an enhanced ability to provide
communications services to its customers an enhanced ability to
build its customer base.
o The combined company will have an enhanced infrastructure,
including the combination of Primary Network's and Mpower's
network.
o The merger will provide Primary Network greater access to capital
resources. Primary Network's business strategy requires access to
financing to develop its business and fund its operations.
The board also considered some potential drawbacks to the merger,
including the following:
o The risk that the potential benefits sought in the merger might
not be fully realized, including the possibility that Mpower
common stock might lose value after the merger.
o The possibility that the merger might not be completed and the
effect the failure to complete the merger would have on Primary
Network's business.
o The risk that despite the efforts of the combined company, key
technical and management personnel might not remain employed by
the combined company.
Nonetheless, the board concluded that these considerations were
mitigated by the benefits of the merger. After reviewing potential alternative
strategies for Primary Network, the board concluded that the merger was in the
best interests of the stockholders of Primary Network.
Date, Time and Place of the Primary Network Special Meeting (see page 29)
The special meeting will be held at ___ a.m., local time, on ____,
2000, at ______.
Purpose of the Primary Network Special Meeting (see page 29)
At the special meeting, you will be asked to consider and vote upon a
proposal to approve the merger, in which Primary Network will become a wholly
owned subsidiary of Mpower and each share of common stock and preferred stock of
Primary Network outstanding
2
<PAGE>
immediately prior to the consummation of the merger will be exchanged into the
right to receive .02022 shares of Mpower common stock. For any resulting
fractional share, a shareholder will receive cash in an amount equal to the
market value of the fractional share.
Primary Network Stockholders Entitled to Vote; Vote Required (see page 31)
The Primary Network board of directors has fixed the close of business
on ____, 2000 as the record date. Only Primary Network common stockholders of
record on the record date are entitled to notice of and to vote at the special
meeting. On the record date, there were ____________ outstanding shares of
common stock held of record by approximately ___ persons. Primary Network also
has 2,306,765 shares of Series A preferred stock and 850,000 shares of Series B
preferred stock outstanding, which do not have voting rights, but which will
participate in the merger on the same terms as the holders of Primary Network
common stock.
To approve the merger, the affirmative vote of a majority of the voting
shares of Primary Network common stock outstanding on the record date is
required.
The Shareholders Agreement (see page 86)
Various stockholders of Primary Network, including Brian Matthews,
Carol Matthews, Charles Weigert, Welton Brison, EC Primary LLC, Quantum Emerging
Growth Partners C.V. and TGV Partners, who collectively own 73% of the votes
represented by the Primary Network common stock as of the date of this Proxy
Statement/Prospectus, have entered into a voting and proxy agreement with
Mpower. Under this agreement, each such stockholder has agreed to vote at any
meeting of stockholders of Primary Network in favor of the approval of the
merger agreement and the merger, and has granted an irrevocable proxy to Mpower
to vote the shares of Primary Network common stock held by such persons if such
stockholder fails to comply with the terms of the voting agreement.
Accordingly, if voted upon, it is assured that these proposals will be
approved by the stockholders of Primary Network.
Interests of Certain Persons/Stock Ownership by Directors and Executive Officers
of Primary Network (see pages 40 and 67)
Certain directors and executive officers of Primary Network may have
interests in the merger that are different from or in addition to yours and
which may represent conflicts of interest. Specifically, Alan Schrager has
served as Chief Financial Officer and director of Primary Network since November
1999 under the terms and conditions of a Secondment Agreement by and between
Primary Network and U.S. Bancorp Libra. Under the terms of such agreement, as
consideration for his services to Primary Network, Alan Schrager has received
680,000 shares of Series B preferred stock of Primary Network and warrants to
purchase 520,000 additional shares of Series B preferred stock. The terms of the
warrants provide that the vesting of the warrants will accelerate in the event
of circumstances that result in a change of control in the ownership of Primary
Network, including the merger. Additionally, under the terms of the Secondment
Agreement, U.S. Bancorp Libra will receive a payment from Primary Network of
0.5% of the total enterprise value of
3
<PAGE>
Primary Network upon the consummation of the merger. Furthermore, certain
officers and directors of Primary Network have been granted stock options that
vest upon a change in control of the ownership of Primary Network, such as the
merger and will receive certain other payments upon the change in control of
Primary Network.
Mpower has agreed to maintain in effect the indemnification provisions
in Primary Network's existing amended and restated articles of incorporation and
by-laws, and maintain insurance for Primary Network's current and former
officers and directors. In addition, Mpower has entered into employment
agreements with Rich Phillips and Tom Hesterman which supercede previous
employment agreements that provided these directors with cash payments upon a
change of control of Primary Network.
As of the record date, directors and executive officers of Primary
Network beneficially owned approximately 64% of the outstanding shares of
Primary Network common stock entitled to vote at the special meeting.
Procedure for Casting Your Vote (see page 32)
Please mail your signed proxy card in the enclosed return envelope or
deliver your proxy via facsimile to (314) 692-3587 as soon as possible, so that
your shares of Primary Network common stock may be represented at the special
meeting. If you do not include instructions on how to vote your properly
executed proxy, your shares will be voted FOR adoption of the merger agreement.
Procedure for Changing Your Vote (see page 32)
If you want to change your vote, send the secretary of Primary Network
a signed proxy card before the special meeting or attend the special meeting in
person. You may also revoke your proxy by sending written notice to the
secretary of Primary Network before the special meeting.
Opinion of Financial Advisor to Primary Network (see page 61)
Primary Network engaged Houlihan Lokey Howard & Zukin Financial
Advisers, Inc. to act as financial advisor to assist the Primary Network board
of directors in evaluating the merger. Houlihan Lokey delivered to the board of
directors an opinion that the exchange ratio as provided for in the merger
agreement is fair to the stockholders from a financial point of view.
Recommendation of the Board of Directors of Primary Network (see page 29)
Your board of directors has determined that the merger is consistent with, and
advances, the long-term business strategy of Primary Network and is fair to you.
Your board of directors has, by a unanimous vote of all directors participating,
approved the merger and recommends that you vote in favor of the merger. Your
board of directors was advised at its meeting that Houlihan Lokey's opinion
would likely be that the exchange ratio as provided for in the merger agreement
is fair from a financial point of view. Houlihan Lokey delivered an opinion to
this effect to the board of Primary Network on April 19, 2000.
4
<PAGE>
The Merger
The Merger (see page 76)
In the merger, Mpower Merger Sub will be merged into Primary Network,
and Primary Network will be the surviving corporation. Each Primary Network
shareholder will receive 0.02022 of a share of Mpower common stock for each
share of Primary Network common stock owned.
Conditions to the Merger (see page 82)
Mpower's, Mpower Merger Sub's and Primary Network's obligations to
complete the merger are subject to the satisfaction or waiver of several
conditions, including the following:
o the shares of Mpower common stock to be issued in the merger must be
authorized for quotation on the NASDAQ National Market System;
o the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
must have expired or been terminated;
o each of Mpower and Primary Network must certify that its representations
and warranties in the merger agreement are true and correct in all material
respects. Each must also certify that it has performed all of its material
obligations under the merger agreement;
o no court order or law can be in effect that prohibits the merger; and
o Mpower and Primary Network each must receive an opinion from its counsel
that the merger will qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended.
Termination of the Merger Agreement; Expenses (see pages 84-85)
Mpower and Primary Network can agree to terminate the merger agreement
without completing the merger, and either company can terminate the merger
agreement if any of the following occurs:
o the merger is not completed by October 31, 2000;
o a court or governmental order permanently prohibits the merger; or
o the non-terminating party materially breaches any representation or
warranty or any covenant in the merger agreement, and the breaching party
does not cure the breach.
All costs and expenses will be paid by the party incurring them.
5
<PAGE>
Regulatory Approvals (see page 70)
Mpower and Primary Network have filed their premerger notification and
report forms under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, on May 5, 2000. The waiting period is scheduled to expire on June 4,
2000, assuming that neither the Antitrust Division of the Department of Justice
nor the Federal Trade Commission issues a request for more information.
Mpower anticipates filing the necessary application with the Federal
Communications Commission to transfer control of Primary Network's authorization
to provide international long distance service by May 16, 2000. Mpower also
anticipates filing any required applications for consent with state commissions
by May 12, 2000. Prior consent of the FCC and of certain state commissions is
necessary to consummate the merger. In addition, post-merger letter
notifications to certain state commissions will also be required following
completion of the merger. Mpower and Primary Network anticipate that any
regulatory approvals will be obtained in the normal course within approximately
60 to 90 days of filing the applications.
Appraisal Rights (see page 71)
Under Delaware law, holders of Primary Network common stock who do not
vote in favor of the merger are entitled to appraisal rights.
Certain U.S. Federal Income Tax Consequences (see page 68)
It is a condition to the merger that Mpower and Primary Network each
have received an opinion of tax counsel to the effect that the exchange of
shares in the merger will constitute a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code. As such, the stockholders of
Primary Network stock generally will not recognize gain or loss for U.S. federal
income tax purposes as a result of the exchange of their Primary Network stock
for Mpower common stock in the merger (except to the extent of cash received in
lieu of fractional shares). However, gain or loss generally will be recognized
at such time as such stockholder sells his Mpower common stock.
Accounting Treatment (see page 68)
The merger will be accounted for by the purchase method in accordance
with accounting principles generally accepted in the United States.
Comparison of Shareholder Rights (see page 98)
Holders of Mpower common stock have different rights than holders of
Primary Network common stock, including differences in voting requirements and
amendments to the organizational documents.
6
<PAGE>
Risk Factors (see page 16)
There are risk factors that should be considered in evaluating how to
vote at the special meeting. The risk factors include the following:
o the value of the shares of Mpower common stock to be issued in connection
with the merger may decline between the Primary Network stockholders
meeting and the consummation of the merger;
o Mpower may not be able to successfully integrate Primary Network into its
operations, which could slow its growth;
o Mpower is not profitable and expects to continue to incur operating losses;
o Mpower's substantial debt creates financial and operating risk;
o If Mpower's expansion plans change, Mpower may need significant additional
funds that it may not be able to obtain;
o Mpower will face technical, operational and strategic challenges that may
prevent Mpower from successfully integrating Primary Network and other
businesses;
o Mpower's operating results are likely to fluctuate and will be difficult to
predict;
o Mpower's success depends on the effectiveness of its management; and
o if Mpower's equipment does not perform as expected, it could delay its
expansion into new markets and our introduction of new services.
7
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
Selected Historical Financial Information of Mpower
Mpower is providing you with the following selected historical
financial data to aid you in your analysis of the financial aspects of the
merger. The historical data for each of the years in the five-year period ended
December 31, 1999 have been derived from the audited historical consolidated
financial statements. No data is present for periods before 1996 since Mpower
commenced its operations in December 1996, and no revenues or expenses were
recognized and no cash transactions occurred between its inception on October
16, 1995 and December 31, 1995.
This information is only a summary and when you read this selected
historical financial data, it is important that you read it in conjunction with
the historical financial statements and related notes in Mpower's annual,
quarterly and other reports filed with the SEC. See "Where You Can Find More
Information" on page 114.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1996 1997 1998 1999
-----------------------------------------------------------------------
(dollars in thousands, except per share amounts)
Statement of Operations Data:
<S> <C> <C> <C> <C>
Operating revenues $ 1 $ 3,791 $ 18,249 $ 55,066
Cost of operating revenues, excluding
depreciation 305 3,928 17,129 50,012
Selling, general and administrative expenses 841 6,440 17,877 44,836
Loss from operations (1,554) (7,851) (21,995) (59,417)
Net loss (1,491) (10,836) (32,065) (69,769)
Basic and diluted loss per share of common
stock $(2.11) $(1.30) $(2.26) $(7.63)
Balance Sheet Data:
Cash and cash equivalents and investments
available for sale, excluding
restricted investments $ 7,897 $ 102,764 $ 84,949 $ 169,070
Restricted investments 57,574 39,379 20,256
Property and equipment, net 3,250 24,617 116,380 191,612
Total assets 12,339 191,977 252,119 402,429
Long term debt 156,637 157,295 161,312
Series A convertible preferred stock 16,665
Series B convertible preferred stock 55,363
Series C convertible preferred stock 29,610
Stockholders' equity 10,792 8,976 63,260 103,781
</TABLE>
8
<PAGE>
Selected Historical Financial Information of Primary Network
The following table sets forth selected consolidated financial
information and other data for Primary Network Holdings, Inc., successor and CDM
On-Line, Inc., predecessor. Please refer to footnotes 1 and 2 in the September
30, 1999 audited financial statements of Primary Network for further explanation
of the organization and basis of presentation and initial formation and
capitalization of Primary Network. The selected consolidated financial
information and other data as of December 31, 1995, 1996, and 1999 and for the
year ended December 31, 1995 and 1996 and the three months ended December 31,
1998 and 1999 are unaudited; however, in the opinion of Primary Network's
management, the unaudited data includes all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the information. The
selected consolidated results of operations and the selected historical
consolidated balance sheet data for the years ended December 31, 1997 and 1998,
the five months ended May 31, 1999 and the four months ended September 30, 1999
have been derived from the audited consolidated financial statements of Primary
Network, successor, and CDM On-Line, predecessor. The results of operations for
the three months ended December 31, 1999 are not necessarily indicative of the
results to be expected for the year ending September 30, 2000 or any other
future period. For all periods presented, the related financial information has
been presented using consistent methods of accounting.
This information is only a summary and when you read the selected
historical consolidated financial statements and other data it is important that
you read it in conjunction with Primary Network's and CDM On-Line's consolidated
financial statements and notes thereto and related "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Five Four
Months Months Quarter Quarter
Ended Ended Ended Ended
1995 1996 1997 1998 5/31/99 9/30/99 12/31/98 12/31/99
----------- ---------- ----------- ------------ ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue 350,285 1,513,619 2,575,552 4,795,571 2,833,284 4,082,137 1,309,629 4,253,513
Net loss from
continuing operations (158,011) (137,176) (1,590,177) (1,470,010) (681,906) (7,308,703) (626,501) (8,378,874)
Total assets 174,437 887,431 1,263,561 1,663,929 4,441,030 61,764,417 1,663,929 64,400,817
Long-term debt and
capital lease
obligations - - - - 492,346 51,117,562 - 54,343,514
Total Stockholders'
Equity (164,981) (305,746) (783,758) (203,734) 1,746,743 2,812,483 (203,734) (5,559,308)
</TABLE>
9
<PAGE>
Unaudited Selected Pro Forma Condensed Combined Financial Information
The following unaudited pro forma condensed combined balance sheet
reflects the combination of the balance sheets of Mpower and Primary Network as
of December 31, 1999 as adjusted for the merger as if the merger had been
consummated on December 31, 1999. The unaudited pro forma condensed combined
statement of operations reflects the combination of the statement of operations
of Mpower and Primary Network for the year ending December 31, 1999 as adjusted
for the merger as if the merger had been consummated on January 1, 1999. The
unaudited pro forma condensed combined financial information has been prepared
using the purchase method of accounting. This pro forma information does not
give effect to any restructuring costs or to any potential cost savings or other
operating efficiencies that could result from the merger.
The unaudited pro forma statements are based on currently available
information and certain assumptions that Mpower believes are reasonable under
the circumstances. The unaudited pro forma condensed combined financial
information does not purport to represent what the combined company's position
or results of operations would have been had the merger occurred on such date or
at the beginning of the earliest period presented or to project the combined
financial position or results of operations for any future date or period.
The unaudited pro forma statements should be read in conjunction with
the separate historical financial statements of Mpower and Primary Network and
its predecessors and the notes thereto, and with the accompanying notes to the
pro forma statements as well as Mpower's historical financial statements and
related notes and sections entitled "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" contained in Mpower's annual,
quarterly and other reports filed with the SEC. See "Where You Can Find More
Information" on page 114.
10
<PAGE>
Unaudited Pro Forma Condensed Combined Balance Sheet
As of December 31, 1999
(in thousands)
<TABLE>
<CAPTION>
Primary
Mpower Network
Historical Historical Pro Forma Pro Forma
12/31/99 12/31/99 Adjustments Combined
------------------------------------------------------ ---------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 42,979 $ 15,644 $ (10,000)(1) $ 48,623
Investments available-for-sale 61,627 - - 61,627
Restricted investments 20,256 - - 20,256
Accounts receivable, net 15,299 2,239 - 17,538
Prepaid expenses and other
current assets 1,527 2,729 - 4,256
------------------------------------------------------ ---------------
Total current assets 141,688 20,612 (10,000) 152,300
Property and equipment, net 191,612 20,362 - 211,974
Investments available-for-sale 64,464 - - 64,464
Other assets 4,665 4,799 - 9,464
Intangible assets - 18,628 93,904(2) 112,532
------------------------------------------------------ ---------------
Total assets $ 402,429 $ 64,401 $ 83,904 $ 550,734
====================================================== ===============
Current liabilities:
Current maturities of long-
term debt and capital lease
obligations $ 623 $ 2,089 $ - $ 2,712
Accounts payable 36,743 4,113 - 40,856
Accrued expenses and other 14,997 9,415 2,500(3) 26,912
----------------------------------------------------- ---------------
Total current liabilities 52,363 15,617 2,500 70,480
Senior Secured Notes, net 157,268 50,687 6,041(4) 213,996
Other long-term debt and capital lease
obligations 4,044 3,656 - 7,700
----------------------------------------------------- ---------------
Total liabilities 213,675 69,960 8,541 292,176
----------------------------------------------------- ---------------
Redeemable preferred stock 84,973 - - 84,973
Stockholders' equity:
Preferred stock, net of deferred
stock compensation - 501 (501)(5) -
Common stock 23 64 (63)(5) 24
Additional paid-in (1,500)(3)
capital 225,300 14,497 56,806(5) 295,103
Accumulated deficit (114,161) (20,621) 20,621(6) (114,161)
Less: Treasury stock (76) - - (76)
Notes receivable from
stockholders for
issuance of common
stock (6,219) - - (6,219)
Accumulated other
comprehensive loss (1,086) - - (1,086)
----------------------------------------------------- ---------------
Total stockholders' equity 103,781 (5,559) 75,363 173,585
----------------------------------------------------- ---------------
Total liabilities,
redeemable preferred
stock and stockholders'
equity $ 402,429 $ 64,401 $ 83,904 $ 550,734
===================================================== ===============
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Unaudited Pro Forma Condensed Combined Statement of Operations
Twelve months ended December 31, 1999
(in thousands, except share and per share data)
Mpower Primary Network Pro Forma Pro Forma
Historical Historical Adjustments Combined
---------------------------------------------------------------- -------------------
<S> <C> <C> <C> <C>
Operating revenues $ 55,066 $ 11,169 $ - $ 66,235
---------------------------------------------------------------- -------------------
Operating expenses:
Cost of operating revenues 50,012 5,722 - 55,734
Selling, general and administrative 44,836 13,297 - 58,133
Stock-based compensation expense 714 - - 714
Depreciation and amortization 18,921 4,750 12,453(1) 36,124
---------------------------------------------------------------- -------------------
114,483 23,769 12,453 150,705
---------------------------------------------------------------- -------------------
Loss from operations (59,417) (12,600) (12,453) (84,470)
Other income (expense):
Interest income (expense), net (10,576) (4,815) - (15,391)
Other, net 224 1,046 - 1,270
---------------------------------------------------------------- -------------------
Net loss from continuing operations (69,769) (16,369) (12,453) (98,591)
Net loss from discontinued operations (82) (82)
---------------------------------------------------------------- -------------------
Net loss (69,769) (16,451) (12,453) (98,673)
Value of preferred stock beneficial
conversion feature (72,500) - - (72,500)
Accretion of preferred to redemption value (6,133) - - (6,133)
Accrued preferred stock dividend (2,577) - - (2,577)
---------------------------------------------------------------- -------------------
Net loss applicable to common stockholders $(150,979) $(16,451) $(12,453) $(179,883)
---------------------------------------------------------------- -------------------
Basic and diluted weighted average shares
outstanding 19,775,410 n/a 1,349,838(2) 21,125,248
Basic and diluted loss per share of
common stock $ (7.63) n/a $ (9.23) $ (8.52)
</TABLE>
Notes to Unaudited Pro Forma Condensed Combined Balance Sheet
(1) Includes $10 million pre-closing cash advance from Mpower to Primary
Network.
(2) Reflects purchase accounting adjustments for the acquisition based on the
Mpower's preliminary estimate of the assets and liabilities assumed. For
purchase accounting, Primary Network's assets have been recorded at their
estimated fair market value subject to adjustments based upon the results
of an independent appraisal. Purchase accounting adjustments were recorded
to reflect the estimated fair value of the acquired customer base of $12
million, to decrease the recorded value of intangible assets acquired by
$18.6 million, to record the excess of purchase cost over fair value of net
assets acquired by $100.5 million and to increase the long-term debt by $6
million. These adjustments are required to record the assets and
liabilities at their estimated fair market values. The calculation of
excess purchase cost over fair value of net assets acquired is as follows:
12
<PAGE>
(amounts in thousands)
Common stock issued $ 68,504
Cash paid 10,000
Options issued 2,800
Direct acquisition costs 1,000
--------------
Total purchase cost 82,304
Less: Net book value of Primary Network (5,559)
Less: Adjustment in net assets to fair value (12,669)
--------------
Excess of purchase cost over fair value of assets
acquired and liabilities assumed (goodwill) $ 100,532
==============
(3) Includes accruals for estimated direct acquisition and registration costs
including legal, accounting and filing fees.
(4) Reflects purchase accounting adjustment to adjust to fair value of debt.
(5) Reflects the estimated value of the Mpower stock exchanged for the
preferred and common stock of Primary Network, based on the recent market
price of Mpower stock.
(6) Reflects elimination of accumulated deficit of Primary Network as part of
the purchase accounting computation.
Notes to Unaudited Pro Forma Condensed Combined Statement of Operations
(1) Reflects 12 months of amortization of intangibles recorded in connection
with acquisition of Primary Network and includes amortization of goodwill
($10.1 million) and amortization of customer base ($2.4 million).
Amortization periods assumed for goodwill and customer base were 10 years
and 5 years, respectively.
(2) Reflects the estimated number of shares of Mpower stock issued in exchange
for the preferred and common stock of Primary Network.
13
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth for Mpower common stock and Primary
Network common stock, for the periods indicated, selected historical per share
data and the corresponding pro forma and pro forma combined amounts, giving
effect to the merger. The data presented is based upon the historical financial
statements and related notes Primary Network included in the Proxy
Statement/Prospectus and Mpower's historical financial statements and related
notes and sections entitled "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" contained in Mpower's annual, quarterly
and other reports filed with the SEC. See "Where You Can Find More Information"
on page 114. This information should be read in conjunction with, and is
qualified in its entirety by, the historical financial statements and related
notes thereto. These data are not necessarily indicative of the results of the
future operations of the combined company or the actual results that would have
occurred if the merger had been consummated prior to the periods indicated.
<TABLE>
<CAPTION>
Primary Pro Forma
Mpower Network Combined
Historical Historical (unaudited)
----------------------------------------------------------------
Book Value Per Common Share
Outstanding:
<S> <C> <C> <C>
December 31, 1999 $4.46 $(0.09) $7.06
Cash Dividends Declared Per Common
Share:
Year ended December 31, 1999 - - -
Net Loss Applicable to Common
Shareholders:
Year ended December 31, 1999 (7.63) - (8.52)
</TABLE>
14
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
Mpower common stock traded on the NASDAQ stock market under the symbol
"MGCX" from May 11, 1998, the date of Mpower's initial public offering, until
February 18, 2000. On February 18, 2000, the Mpower common stock began trading
under the symbol "MPWR". The following sets forth the reported high and low sale
prices for the Mpower common stock for each fiscal quarter since the Mpower
common stock first commenced trading on May 11, 1998 through December 31, 1999.
Primary Network common stock is not publicly traded.
High Low
-----------------------------------
May 11, 1998 through June 30, 1998 $ 19.56 $ 14.00
Quarter Ending September 30, 1998 $ 17.93 $ 8.00
Quarter Ending December 31, 1998 $ 10.50 $ 5.25
Quarter Ending March 31, 1999 $ 10.00 $ 6.00
Quarter Ending June 30, 1999 $ 47.00 $ 9.00
Quarter Ending September 30, 1999 $ 31.56 $ 15.56
Quarter Ending December 31, 1999 $ 50.75 $ 19.69
Quarter Ending March 31, 2000 $ 76.94 $ 44.00
Mpower has never declared any cash dividends on its common stock.
No established trading market exists for Primary Network common stock.
Primary Network has not paid any cash dividends on its capital stock.
15
<PAGE>
RISK FACTORS
This Proxy Statement/Prospectus contains forward-looking statements
that involve known and unknown risks and uncertainties. The actual results of
the combined company may differ materially from those anticipated in these
forward-looking statements. When voting on the merger, Primary Network
stockholders should carefully consider the risks described below, elsewhere in
this document, and in the documents we incorporate by reference into this
document. Keep in mind that the risks described below are not the only risks
facing Mpower, Primary Network or the combined company.
The value of the shares of Mpower common stock to be issued in
connection with the merger may decline between the Primary Network special
meeting and the consummation of the merger. If the market price of Mpower common
stock drops, the value of the Mpower common stock a Primary Network stockholder
will receive as a result of the merger will also drop, since the formula for
converting Primary Network common stock into Mpower common stock is a fixed
exchange ratio of 0.02022 of a share of Mpower common stock for each share of
Primary Network common stock.
Directors and officers of Primary Network may have conflicts of
interest that influence their decision to approve the merger. Alan Schrager,
Primary Network's Chief Financial Officer, has been serving under the terms and
conditions of a Secondment Agreement between Primary Network and U.S. Bancorp
Libra, and has received shares of preferred stock and warrants to purchase
additional shares. As part of the Secondment Agreement, U.S. Bancorp Libra will
receive a payment equal to 0.5% of the total enterprise value of Primary Network
upon consummation of the merger. Blake Ashby, Mike Torrence and Tony Hartke have
been granted stock options that vest on a change of control in the ownership of
Primary Network. Mpower has agreed to maintain in effect the indemnification
provisions in Primary Network's existing amended and restated articles of
incorporation and by-laws, and maintain insurance for Primary Network's current
and former officers and directors. Finally, Mpower has entered into employment
agreements with Rich Phillips and Tom Hesterman.
Mpower is not profitable and expects to continue to incur operating
losses. Mpower recorded net losses of $69.8 million in 1999, $32.1 million in
1998 and $10.8 million in 1997. In addition, Mpower had negative cash flow from
operations of $45.9 million in 1999, $24.2 million in 1998 and $4.5 million in
1997. Mpower does not generate enough cash flow to cover its operating and
investing expenses. Its historical earnings were insufficient to cover combined
fixed charges and dividends on preferred stock by $76.4 million for the year
ended December 31,1999. Combined fixed charges and dividends include interest
and dividends, whether paid or accrued. Mpower expects to record significant net
losses and generate negative cash flow from operations for the foreseeable
future. Mpower cannot assure you that it will achieve or sustain profitability
or generate sufficient positive cash flow from operations to meet its planned
capital expenditures, working capital and debt service requirements.
16
<PAGE>
Mpower's substantial debt creates financial and operating risk. Mpower
has a substantial amount of debt. As of March 31, 2000, giving pro forma effect
to the acquisition of all of the 12% Senior Discount Notes due 2006, Mpower
would have had approximately $468 million of total debt outstanding. The terms
of Mpower's 13% Senior Notes due 2010 and its other outstanding debt limit, but
do not prohibit, Mpower from incurring additional debt. For example, the
indenture for Mpower's Senior Notes allows it to incur an unlimited amount of
debt to finance the cost of acquiring equipment used in its business. Mpower
expects to incur significant amounts of additional debt in the future to fund
its expansion into new markets, develop its network and expand its customer
base. Mpower's level of debt could have important consequences to you, including
the following:
o a substantial portion of Mpower's cash flow from operations will
be dedicated to paying principal and interest on its debt, thereby
reducing funds available for expansion or other purposes;
o Mpower's significant amount of debt could make it more vulnerable
to changes in general economic conditions or increases in
prevailing interest rates;
o Mpower's ability to obtain additional financing for working
capital, capital expenditures, acquisitions, general corporate
purposes or other purposes could be impaired;
o Mpower's failure to comply with the restrictions contained in any
of its financing agreements could lead to a default which could
result in its being required to repay all of its outstanding debt;
and
o Mpower may be more leveraged than some of its competitors, which
may result in a competitive disadvantage.
If Mpower's expansion plans change, it may need significant additional
funds that it may not be able to obtain. If its expansion plans change, Mpower
may require significant amounts of capital to fund the development and expansion
of its business and services as well as operating costs and debt service. If
Mpower cannot generate or otherwise obtain sufficient funds, it may be required
to delay or abandon these expansion plans. This may have a negative impact on
Mpower's growth and ability to compete in the communications industry. Mpower
expects to fund its capital requirements through existing resources, internally
generated funds and debt or equity financing. Mpower cannot assure you it will
be successful in raising sufficient debt or equity financing on acceptable
terms.
It is difficult to predict Mpower's future operating results from
Mpower's previous performance since Mpower's business model is still evolving
and Mpower has limited operating history. Mpower's limited operating history
makes predicting future results difficult. Because some of its services are new,
Mpower cannot be sure businesses will
17
<PAGE>
buy them. In addition, Mpower has recently hired a new chief executive officer
who has realigned its operations into regional service areas to support its
expanding geographic markets and may make other changes which could increase the
cost of providing its services.
Mpower will face technical, operational and strategic challenges that
may prevent it from successfully integrating Primary Network and other
businesses. As part of its growth strategy, Mpower may continue to acquire other
businesses as a means of expanding into new markets or developing new services.
Mpower's pending acquisitions involve risks related to the integration and
management of acquired technology, operations and personnel. The integration of
Primary Network into Mpower's organization will be a complex, time consuming and
expensive process, and may disrupt its business if not completed in a timely and
efficient manner. Following the acquisition of Primary Network, Mpower must
operate as a combined organization using common information and communication
systems, operating procedures, financial controls and human resources practices.
Mpower may encounter substantial difficulties, costs and delays involved in
integrating the operations of Primary Network, including:
o difficulties assimilating acquired back-office operations and
personnel;
o integrating different network equipment and systems into its
operations;
o potential disruptions of its ongoing business;
o the diversion of resources and management time;
o the possibility uniform standards, controls, procedures and
policies may not be maintained;
o risks associated with entering new markets in which Mpower has
little or no experience; and
o the potential impairment of relationships with employees or
customers as a result of changes in management.
Primary Network or any other business Mpower might acquire might not
perform as expected. Furthermore, Mpower has never acquired another business of
significant size. Accordingly, Mpower has no experience dealing with any of the
risks associated with making such acquisitions. Mpower's failure to successfully
address these risks could have a material adverse effect on Mpower's business.
18
<PAGE>
Mpower's operating results are likely to fluctuate and will be
difficult to predict. Mpower's annual and quarterly operating results are likely
to fluctuate significantly as a result of numerous factors, many of which are
outside of its control. These factors include:
o the timing and willingness of traditional telephone companies to
provide Mpower with central office space and the prices, terms and
conditions on which they make the space available to Mpower;
o the amount and timing of capital expenditures and other costs
relating to the expansion of Mpower's networks and the marketing
of its services;
o delays in the commencement of operations in new regions and the
generation of revenue because certain network elements have lead
times that are controlled by incumbent carriers and other third
parties;
o the ability to develop and commercialize new services by Mpower or
its competitors;
o the ability to deploy on a timely basis Mpower's services to
adequately satisfy customer demand;
o Mpower's ability to successfully operate its network;
o the rate at which customers subscribe to Mpower's services;
o decreases in the prices for Mpower's services due to competition,
volume-based pricing and other factors;
o the mix of line orders between business customers (which typically
have higher margins) and residential customers;
o the development and operation of Mpower's billing and collection
systems and other operational systems and processes;
o the rendering of accurate and verifiable bills from the incumbent
carriers from whom Mpower leases transport and resolution of
billing disputes;
o the incorporation of enhancements, upgrades and new software and
hardware products into Mpower's network and operational processes
that may cause unanticipated disruptions; and
o the interpretation and enforcement of regulatory developments and
court rulings concerning the 1996 Telecommunications Act,
interconnection agreements and the antitrust laws.
19
<PAGE>
The terms of Mpower's debt covenants and preferred stock could limit
how it conducts its business and its ability to raise additional funds. The
agreements which govern the terms of Mpower's debt, including the indentures for
its outstanding 12% Senior Subordinated Discount Notes due 2006, its outstanding
13% Senior Notes due 2010 and its outstanding 13% Senior Secured Notes due 2004,
contain covenants that restrict its ability to:
o incur additional debt;
o pay dividends and make other distributions;
o prepay subordinated debt;
o make investments and other restricted payments;
o create liens;
o sell assets; and
o engage in transactions with affiliates.
In addition, the terms of Mpower's outstanding preferred stock require
it to obtain the approval of the holders before it takes specified actions.
Please see "Description of Mpower Capital Stock."
Mpower's future financing arrangements will likely contain similar or
more restrictive covenants. As a result of these restrictions, Mpower may be:
o limited in how it conducts its business;
o unable to raise additional debt or equity financing to operate
during general economic or business downturns; and
o unable to compete effectively or to take advantage of new business
opportunities.
These restrictions may affect Mpower's ability to grow in accordance
with its plans.
Mpower's success depends on the effectiveness of its management. Mpower
has a new chief executive officer and is considering other additions to its
management team. Mpower's business is managed by a small number of key
management personnel, the loss of some of whom could impair its ability to carry
out its planned expansion. Mpower believes its future success will depend in
large part on its ability to attract and retain highly skilled and qualified
personnel. None of Mpower's key executives other than Rolla P. Huff, its new
chief executive officer, is a party to a long-term employment
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agreement and Mpower does not maintain key man insurance on its officers. Mpower
has recently hired a new chief executive officer, chief financial officer and
other new members of its senior management team. Mpower is considering making
further additions to its management team. Mpower cannot assure you that its new
senior officers will be effective in managing its company or will successfully
work with its existing management team.
If Mpower's equipment does not perform as expected, it could delay its
expansion into new markets and its introduction of new services. In implementing
its strategy, Mpower may use new or existing technologies to offer additional
services. Mpower also plans to use equipment manufactured by multiple vendors to
offer its current services and future services in each of its new markets. If
Mpower cannot successfully install and integrate the technology and equipment
necessary to deliver its current services and any future services within the
time frame and with the cost effectiveness Mpower currently contemplates, it
could be forced to delay or abandon a portion of its expansion plans or the
introduction of new services. This could also affect Mpower's ability to attract
and retain customers.
The failure of Mpower's operations support system to perform as Mpower
expects could impair its ability to retain customers and obtain new customers or
result in increased capital expenditures. Mpower employs a proprietary
operations support system which is expected to be an important factor in its
success. If the operations support system fails or is unable to perform as
expected, Mpower could suffer customer dissatisfaction, loss of business or the
inability to add customers on a timely basis, any of which would adversely
affect its revenues. Furthermore, problems may arise with higher processing
volumes or with additional automation features, which could potentially result
in system breakdowns and delays and additional, unanticipated expense to remedy
the defect or to replace the defective system with an alternative system.
Mpower's failure to manage growth could result in increased costs and
an inability to achieve its expansion goals. Mpower may be unable to manage its
growth effectively. This could increase the costs of expansion and impair its
ability to fully implement its expansion plans. The development and expansion of
Mpower's business and entry into new markets will depend on, among other things,
its ability to achieve the following goals in a timely manner, at reasonable
costs and on satisfactory terms and conditions:
o purchase, install and operate switches and other equipment,
including DSL equipment;
o accurately assess potential new markets;
o negotiate suitable interconnection agreements with, and
arrangements for installing Mpower's equipment at the central
offices of, incumbent carriers on satisfactory terms and
conditions, including incumbent carriers in markets Mpower plans
to enter;
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o hire and retain qualified personnel;
o lease suitable access to transport networks;
o lease or purchase suitable sites; and
o obtain required government authorizations.
Mpower has experienced rapid growth since its inception, and Mpower
believes sustained growth will place a strain on its operational, human and
financial resources. Mpower's growth will also increase its operating complexity
as well as the level of responsibility for both existing and new management
personnel. Mpower's ability to manage its expansion effectively will depend on
the continued development of plans, systems and controls for its operational,
financial and management needs and on its ability to expand, train and manage
its employee base.
Mpower's services may not achieve sufficient market acceptance to
become profitable. To be successful, Mpower must develop and market services
that are widely accepted by businesses at profitable prices. Mpower's success
will depend upon the willingness of its target customers to accept it as an
alternative provider of local, long distance, high-speed data and Internet
services. Although Mpower is in the process of rolling out high-speed data and
Internet services and developing additional products and services, Mpower might
not be able to provide the range of communication services its target business
customers need or desire. In addition, the lack of willingness by e-commerce
providers to accept Mpower as a marketing, sales and distribution partner would
have a negative impact on its ability to deliver additional products and
services to its target customers.
Mpower's failure to achieve or sustain market acceptance at desired
pricing levels could impair its ability to achieve profitability or positive
cash flow. Prices for data communication services have fallen historically, a
trend Mpower expects will continue. Accordingly, Mpower cannot predict to what
extent it may need to reduce its prices to remain competitive or whether Mpower
will be able to sustain future pricing levels as its competitors introduce
competing services or similar services at lower prices. Mpower's ability to meet
price competition may depend on its ability to operate at costs equal to or
lower than its competitors or potential competitors. There is a risk that
competitors, perceiving Mpower to lack capital resources, may undercut its rates
or increase their services or take other actions in an effort to force Mpower
out of business. Mpower's failure to achieve or sustain market acceptance at
desired pricing levels could impair its ability to achieve profitability or
positive cash flow.
If Mpower is unable to negotiate and enforce favorable interconnection
agreements and arrangements for installing its equipment, Mpower could have
difficulty operating profitably in its existing markets and entering new
markets. Mpower must negotiate and renew favorable interconnection agreements
and arrangements for installing its equipment with other companies, including
incumbent carriers, in markets
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Mpower plans to enter. The rates charged to Mpower under the interconnection
agreements might not continue to be low enough for it to attract a sufficient
number of customers and to operate the business on a profitable basis. In
addition, Mpower's interconnection agreements provide for its connection and
maintenance orders to receive attention on the same basis as the incumbent
carrier's customers and for the incumbent carriers to provide adequate capacity
to keep blockage within industry standards. However, from time to time, Mpower
has experienced excessive blockage in the delivery of calls to and from the
incumbent carriers due to an insufficient number of phone lines installed by the
incumbent carriers between their switches and Mpower's switches. Blocked calls
result in customer dissatisfaction which may result in the loss of business.
Delays by the incumbent carriers in connecting Mpower's customers to
Mpower's network could result in customer dissatisfaction and loss of business.
Mpower relies on the timeliness of incumbent carriers and competitive carriers
in processing its orders for customers switching to Mpower's service and in
maintaining the customer's standard telephone lines to assure uninterrupted
service. The incumbent carriers are Mpower's competitors and have had little
experience leasing standard telephone lines to other companies. Therefore, the
incumbent carriers might not be able to continue to provide and maintain leased
standard telephone lines in a prompt and efficient manner as the number of
standard telephone lines requested by competitive carriers increases.
Mpower may not be able to service its customers if Mpower cannot secure
sufficient telephone lines and cable to meet its future needs. Mpower may not be
able to lease sufficient telephone lines and cable in markets it wants to enter
or renew its lease arrangements or obtain comparable arrangements from other
carriers in its existing markets. Because Mpower leases rather than constructs
telephone lines and cable in each of its markets, Mpower would be unable to
service its customers if it could not obtain sufficient telephone lines and
cable. Mpower's inability to lease sufficient telephone lines and cable could
result in the loss of customers, the inability to add new customers and
limitations on Mpower's ability to enter new markets.
Mpower's reliance on a limited number of equipment suppliers could
result in additional expenses or delays in its expansion. Mpower currently
relies, and expects to continue to rely, on a limited number of third party
suppliers to manufacture the equipment it requires to implement its DSL
technology. If Mpower's suppliers enter into competition with it, or if Mpower's
competitors enter into exclusive or restrictive arrangements with Mpower's
suppliers, it may materially and adversely affect the availability and pricing
of the equipment Mpower purchases. Mpower's reliance on third-party vendors
involves a number of additional risks, including the absence of a guaranteed
supply of necessary equipment and reduced control over delivery schedules,
quality assurance, production yields and costs. Mpower cannot assure you that
its vendors will be able to meet its needs in a satisfactory and timely manner
in the future or that it will be able to obtain alternative vendors when and if
needed. It could take a significant period of time to establish relationships
with alternative suppliers for critical technologies and to introduce substitute
technologies into Mpower's network. As a result, the use of alternative vendors
could delay Mpower's expansion plans. In addition,
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if Mpower changes vendors, it may need to replace all or a portion of the DSL
equipment deployed within its network at significant expense in terms of
equipment costs and loss of revenues in the interim.
Because Mpower competes against established industry competitors with
substantially greater resources, Mpower may not be able to achieve its operating
and financial objectives. The market in which Mpower operates is highly
competitive and most of its competitors and potential competitors have
substantially greater resources than Mpower has. Mpower's failure to compete
effectively could prevent Mpower from obtaining sufficient market share to
become profitable.
If Mpower is not able to obtain or implement new technologies, it may
lose business and limit its ability to attract new customers. Mpower may be
unable to obtain access to new technology on acceptable terms or at all. Mpower
may be unable to adapt to new technologies and offer services in a competitive
manner. If these events occur, Mpower may lose customers to competitors offering
more advanced services and Mpower's ability to attract new customers would be
hindered. Rapid and significant changes in technology are expected in the
communications industry. Mpower cannot predict the effect of technological
changes on its business. Mpower's future success will depend, in part, on its
ability to anticipate and adapt to technological changes, evolving industry
standards and changing needs of its current and prospective customers.
A system failure or breach of network security could cause delays or
interruptions of service to Mpower's customers and result in customer
dissatisfaction. Interruptions in service, capacity limitations or security
breaches could have a negative effect on customer acceptance and, therefore, on
Mpower's revenues and ability to attract new customers. Mpower's networks may be
affected by physical damage, power loss, capacity limitations, software defects,
breaches of security by computer viruses, break-ins or otherwise, and other
factors which may cause interruptions in service or reduced capacity for
Mpower's customers.
If Mpower is unable to effectively deliver DSL services to a
substantial number of customers, it may not achieve its revenue goals. Mpower
cannot guarantee its network will be able to connect and manage a substantial
number of customers at high transmission speeds. If Mpower cannot achieve and
maintain digital transmission speeds that are otherwise available in the market,
it may lose customers to competitors with higher transmission speeds and it may
not be able to attract new customers. While digital transmission speeds of up to
1.5 Mbps are possible on portions of Mpower's network, that speed may not be
available over a majority of its network. Actual transmission speeds on Mpower's
network will depend on a variety of factors, many of which are beyond its
control, including the distance an end user is located from a central office,
the quality of the telephone lines, the presence of interfering transmissions on
nearby lines and other factors.
Mpower may lose customers or potential customers because the telephone
lines it requires may be unavailable or in poor condition. Mpower's ability to
provide DSL
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services to potential customers depends on the quality, physical condition,
availability and maintenance of telephone lines within the control of the
incumbent carriers. If the telephone lines are not adequate, Mpower may not be
able to provide DSL services to many of its target customers and its expected
revenues will be diminished. Mpower believes the current condition of telephone
lines in many cases may be inadequate to permit it to fully implement its DSL
services. In addition, the incumbent carriers may not maintain the telephone
lines in a condition that will allow Mpower to implement its DSL services
effectively or may claim they are not of sufficient quality to allow Mpower to
fully implement or operate its DSL services. Further, some customers use
technologies other than copper lines to provide telephone services, and as a
result, DSL services might not be available to these customers. Interference or
claims of interference could delay Mpower's rollout or result in customer
dissatisfaction.
Interference, or claims of interference by the incumbent carriers, if
widespread, could adversely affect Mpower's speed of deployment, reputation,
brand image, service quality and customer satisfaction and retention.
Technologies deployed on copper telephone lines, such as DSL, have the potential
to interfere with other technologies on the copper telephone lines. Interference
could degrade the performance of Mpower's services or make Mpower unable to
provide service on selected lines and the customers served by those lines.
Although Mpower believes its DSL technologies, like other technologies, do not
interfere with existing voice services, incumbent carriers may claim the
potential for interference permits them to restrict or delay Mpower's deployment
of DSL services. The procedures to resolve interference issues between
competitive carriers and incumbent carriers are still being developed. Mpower
may be unable to successfully resolve interference issues with incumbent
carriers.
Mpower's success will depend on growth in the demand for Internet
access and high-speed data services. If the markets for the services Mpower
offers, including Internet access and high-speed data services, fail to develop,
grow more slowly than anticipated or become saturated with competitors, Mpower
may not be able to achieve its projected revenues. The markets for business
Internet and high-speed data services are in the early stages of development.
Demand for Internet services is highly uncertain and depends on a number of
factors, including the growth in consumer and business use of new interactive
technologies, the development of technologies that facilitate interactive
communication between organizations and targeted audiences, security concerns
and increases in data transport capacity. In addition, the market for high-speed
data transmission via DSL technology is relatively new and evolving. Various
providers of high-speed digital services are testing products from various
suppliers for various applications, and no industry standard has been broadly
adopted. Critical issues concerning commercial use of DSL for Internet and
high-speed data access, including security, reliability, ease of use and cost
and quality of service, remain unresolved and may impact the growth of these
services.
The desirability and marketability of Mpower's Internet service may be
adversely affected if Mpower is not able to maintain reciprocal relationships
with other Internet service providers. The Internet is comprised of many
Internet service providers and
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underlying transport providers who operate their own networks and interconnect
with other Internet service providers at various points. As Mpower commences the
operation of Internet services, connections to the Internet will be provided
through wholesale carriers. Mpower anticipates that, as its volume increases, it
will enter into reciprocal agreements with other Internet service providers.
Mpower cannot assure you other national Internet service providers will maintain
reciprocal relationships with it. If Mpower is unable to maintain these
relationships, Mpower's Internet services may not be attractive to its target
customers, which would impair its ability to retain and attract customers. In
addition, the requirements associated with maintaining relationships with the
major national Internet service providers may change. Mpower cannot assure you
it will be able to expand or adapt its network infrastructure to meet any new
requirements on a timely basis, at a reasonable cost, or at all.
Mpower may incur liabilities as a result of its Internet service
offerings. United States law relating to the liability of on-line service
providers and Internet service providers for information carried on,
disseminated through, or hosted on their systems is currently unsettled. If
liability is imposed on Internet service providers, Mpower would likely
implement measures to minimize its liability exposure. These measures could
require Mpower to expend substantial resources or discontinue some of its
product or service offerings. In addition, increased attention to liability
issues, as a result of litigation, legislation or legislative proposals, could
adversely affect the growth and use of Internet services.
Changes in laws or regulations could restrict the way Mpower operates
its business and could negatively affect its costs and competitive position. A
significant number of the services Mpower offers are regulated at the federal,
state and/or local levels. If these laws and regulations change or if the
administrative implementation of laws develops in an adverse manner, there could
be an adverse impact on Mpower's costs and competitive position. In addition,
Mpower may expend significant financial and managerial resources to participate
in administrative proceedings at either the federal or state level, without
achieving a favorable result. Mpower believes incumbent carriers and others may
work aggressively to modify or restrict the operation of many provisions of the
Telecommunications Act. Mpower expects incumbent carriers and others to continue
to pursue litigation in courts, institute administrative proceedings with the
Federal Communications Commission, which is referred to as the FCC, and other
regulatory agencies and lobby the United States Congress, all in an effort to
affect laws and regulations in a manner favorable to them and against the
interest of competitive carriers.
Mpower may not be able to collect all of the access charges it has
billed to long distance carriers. When Mpower's facilities are used to originate
a customer's long distance call and deliver the call to the long distance
carrier designated by the customer, or to terminate a long distance call
received from a long distance carrier by delivering it to a telephone number
connected to its network, the long distance carrier is required to pay Mpower
for access to its network and the use of its facilities. These charges are
called access charges. Access charges represented a significant portion of
revenues in 1998 and 1999. While Mpower recently settled its disputes with AT&T
and MCI
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WorldCom, certain other long distance carriers responsible for generating a
portion of its access charge revenues continue to refuse to pay the full amount
of access charges billed to them under Mpower's tariffs. The law applicable to
Mpower's disputes with these carriers is unclear and Mpower may not be able to
collect the full amount of the access charges owed to it. Until these disputes
are resolved and access charge receivables are collected on a timely basis,
Mpower cannot rely on these revenues as a source of cash flow. As a result, it
may be required to raise additional capital sooner than it currently
anticipates.
The prices Mpower charges for Mpower's services and pays for the use of
services of incumbent carriers and other competitive carriers may be negatively
affected in regulatory proceedings, which could result in decreased revenues,
increased costs and loss of business. If Mpower were required to decrease the
prices Mpower charges for its services or to pay higher prices for services it
purchases from incumbent carriers and other competitive carriers, it would have
an adverse effect on Mpower's ability to achieve profitability and offer
competitively priced services. Mpower must file tariffs with state and federal
regulators which indicate the prices it charges for it services. In addition,
Mpower purchases some tariffed services from incumbent carriers and/or
competitive carriers. The rate Mpower pays for other services Mpower purchases
from incumbent carriers and other competitive carriers are set by negotiations
between the parties. All of the tariffed prices may be challenged in regulatory
proceedings by customers, including incumbent carriers, competitive carriers and
long distance carriers who purchase these services. These negotiated rates are
also subject to regulatory review. In August 1999, the FCC initiated a
proceeding which is considering the reasonableness of competitive carrier access
charges and is seeking comments on whether the FCC should regulate the access
charges set by competitive carriers. While the outcome of this proceeding cannot
be predicted, if Mpower were required to decrease its access charges, it could
have an adverse effect on its expected revenues.
Mpower's forward-looking statements may materially differ from actual
events or results. This prospectus contains "forward-looking statements," which
you can generally identify by the use of forward-looking words, including
"believe," "expect," "intend," "may," "will," "should," "could," "anticipate" or
"plan" or the negative or other variations of these terms or comparable
terminology, or by discussion of strategies that involve risks and
uncertainties. Mpower often uses these types of statements when discussing:
o Mpower's plans and strategies;
o Mpower's anticipation of profitability or cash flow from
operations;
o the development of Mpower's business;
o the expected market for Mpower's services and products;
o Mpower's anticipated capital expenditures; or
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o changes in regulatory requirements; and other statements contained
in this prospectus regarding matters that are not historical
facts.
Mpower cautions you that these forward-looking statements are only
predictions and estimates regarding future events and circumstances. Mpower
cannot assure you it will achieve the future results reflected in these
statements.
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THE PRIMARY NETWORK SPECIAL MEETING
This Proxy Statement/Prospectus is being provided in connection with
the solicitation of proxies from you by the Primary Network board of directors
for use at the special meeting.
Date, Time and Place
The special meeting will be held at ___ a.m., local time, on ____,
2000, at ______.
Purposes of the Special Meeting
At the special meeting, you will be asked to consider and vote upon a
proposal to approve the merger, in which Primary Network will become a wholly
owned subsidiary of Mpower and each share of common stock and preferred stock of
Primary Network outstanding immediately prior to the consummation of the merger
will be exchanged into the right to receive .02022 shares of Mpower common
stock.
Recommendations of the Primary Network Board of Directors; Reasons for the
Merger
The board of directors, by unanimous vote of all directors
participating in the meeting at which the merger was approved, recommends that
you vote in favor of the merger. In the board's view, the merger offers a number
of benefits to Primary Network stockholders, most significantly:
o The merger will provide Primary Network stockholders with an
ownership interest in a large telecommunications service provider.
Mpower is a large publicly traded telecommunications service
provider, with an equity capital base of approximately $ 449
million as of March 31, 2000, and a market capitalization of
approximately $1.462 billion as of April 28, 2000.
o The combined company will have an enhanced ability to provide
communications services to its customers, including facility-based
voice services, and an enhanced ability to build its customer
base.
o The combined company will have an enhanced infrastructure,
including the combined size of Primary Network's and Mpower's
network.
o The merger will provide Primary Network greater access to capital
resources. Primary Network's business strategy requires access to
financing to develop its business and fund its operations.
o The merger would result in a larger, more diversified company,
better able to compete effectively in a rapidly changing and
increasingly competitive industry.
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o The merger will provide Primary Network with an experienced
management team with a proven record in the telecommunications
industry.
o The merger will provide Primary Network's stockholders with
greater liquidity by providing them a security that is listed and
traded on the Nasdaq National Market.
In the course of its deliberations, Primary Network's board reviewed
with Primary Network's management and outside advisors a number of additional
factors relevant to the merger, including:
o Primary Network's business, financial condition, results of
operations and prospects.
o Primary Network's management's view as to the financial condition,
results of operations and businesses of Mpower and Primary Network
before and after giving effect to the merger based on management's
due diligence review and review of publicly available information.
o Market conditions and historical market prices, volatility and
trading information with respect to Mpower common stock.
o The impact of the merger on Primary Network's customers and
employees.
o Primary Network's evaluation of other potential strategic
relationships.
The board also considered a number of possible drawbacks of the
transaction, including the following:
o The risk that the potential benefits sought in the merger might
not be fully realized, including the possibility that Mpower stock
might lose value after the merger.
o The possibility that the merger might not be completed and the
effect the failure to complete the merger would have on Primary
Network's business, including the termination fee.
o The risk that despite the efforts of the combined company, key
technical and management personnel might not remain employed by
the combined company.
o The difficulty of managing separate operations at different
geographic locations.
o The other risks described under "Risk Factors" on page 16 of the
Proxy Statement/Prospectus.
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Nonetheless, the board concluded that these considerations were
mitigated by the benefits of the merger. Accordingly, the board concluded that
the merger was in the best interests of the stockholders of Primary Network.
The board also considered a number of alternative strategies for
Primary Network, including pursuing an initial public offering, other private
debt and equity financing alternatives and pursuing additional strategic
acquisitions. The board determined that an initial public offering was not a
viable option given prevailing market conditions, and that it was not possible
to predict when such an offering would be feasible. The board also determined
that, as a private company operating independently, Primary Network could have
difficulty obtaining sufficient capital to pursue its objectives, particularly
in light of recent market developments and the impact of such developments on
the availability of privately placed debt and equity financings. Furthermore,
after considering a number of other strategic possibilities with potential
acquirors, the board determined that Mpower presented the most attractive offer.
Accordingly, the board concluded that the merger was the superior alternative.
Only Common Stockholders of Record as of the Record Date Are Entitled to Vote
The Primary Network board of directors has fixed the close of business
on ____, 2000 as the record date. Only Primary Network common stockholders of
record on the record date are entitled to notice of and to vote at the special
meeting. On the record date, there were ____________ outstanding shares of
common stock held of record by approximately ___ persons. Primary Network also
has 2,306,765 shares of Series A preferred stock and 850,000 shares of Series B
preferred stock outstanding, which do not have voting rights, but which will
participate in the merger on the same terms as the holders of Primary Network
common stock.
Votes Required for Approval
The merger must be approved by the affirmative vote, in person or by
proxy, of the holders of majority of the voting shares of Primary Network common
stock outstanding on the record date and entitled to vote at the special
meeting. Brian Matthews, Carol Matthews, Charles Wiegart, Welton Brison, Tom
Hesterman, Richard Phillips, John Alden, EC Primary LLC, Quantum Emerging Growth
Partners, C.V. and TGV Partners, which together hold approximately 73% of
Primary Network common stock, have agreed to vote in favor of the merger and
have granted an irrevocable proxy to Mpower to vote their shares of Primary
Network common stock if such stockholders fail to comply with the terms of their
agreement with Mpower.
You are entitled to one vote per share of Primary Network common stock
that you own.
If fewer shares of Primary Network common stock are voted in favor of
the merger proposal than the number required for approval, the special meeting
may be postponed or adjourned to give additional time to solicit and obtain
additional proxies or votes. At any subsequent reconvening of the special
meeting, the proxy holders will vote
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all proxies in the same manner as we would have voted the proxies at the special
meeting, except for any proxies that have effectively been revoked or withdrawn.
Voting Your Shares and How Proxies Are Counted
You must submit a proxy card to have your vote counted at the meeting.
A proxy card is enclosed for that purpose.
The proxy holders will vote all shares of Primary Network common stock
represented by properly executed proxies received before or at the special
meeting and not revoked as instructed on the proxies. If no instructions are
indicated on a properly executed and returned proxy, the proxy holders will vote
the proxy in favor of the merger proposal.
A properly executed proxy marked "Abstain," although counted for
purposes of determining a quorum, will not be voted in favor of or against any
proposal. However, because the affirmative vote of a majority of the voting
shares of Primary Network common stock outstanding is required for approval of
the merger proposal, a proxy marked "Abstain" will have the effect of a vote
against the merger proposal.
Revoking Your Proxy
You may revoke your proxy at any time before you use it:
o by delivering to Primary Network a signed notice of revocation;
o by a later dated vote by proxy, signed and returned; or
o by attending the special meeting and voting in person.
Your attendance at the special meeting will not in itself constitute
the revocation of a proxy.
Soliciting Proxies
In addition to solicitation by mail, directors, officers and employees
of Primary Network may solicit proxies in person without additional
compensation. Primary Network may also request by telephone or telegram the
return of proxies. The extent to which this will be necessary depends entirely
upon how promptly proxies are returned. Mpower will pay the cost of SEC
registration fees related to the Mpower common stock to be issued in the merger.
The costs of printing and mailing this Proxy Statement/Prospectus and soliciting
proxies will be paid by Primary Network.
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You Should Not Send Any Certificates Representing Primary Network Common Stock
with the Enclosed Proxy Card
A letter of transmittal with instructions for the surrender of stock
certificates for Primary Network common stock will be mailed to you as soon as
practicable after the completion of the merger.
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THE COMPANIES
Primary Network
Primary Network is an integrated communications provider offering data
and voice telecommunications services to both business and residential customers
in second-tier and third-tier markets in the Midwestern United States. Primary
Network's advanced network is based on a new generation of Digital Subscriber
Line, which is referred to as DSL, platforms and Asynchronous Transfer Mode,
which is referred to as ATM, switches.
Primary Network's voice and data service offerings include:
o High-speed Internet access for residences and small to
medium-sized businesses via both traditional methods and DSL
technology;
o Telecommuting network services;
o Local telephone service;
o Long distance telephone service;
o Low cost long distance voice over DSL;
o Web hosting, collocation and other Internet-related services;
o Wide area network solutions for data-intensive businesses; and
o Cellular and paging (as an agent of Southwestern Bell).
Primary Network currently offers these services in four metropolitan
areas:
o St. Louis, Missouri;
o Kansas City, Missouri;
o Springfield, Missouri and;
o Tulsa, Oklahoma.
As of March 31, 2000, Primary Network had 43 central offices in service
throughout these four metropolitan areas. As of April 30, 2000, Primary Network
had over 1,000 dedicated access customers, approximately 500 DSL customers in
service, approximately 12,000 other business customers (mainly modem access,
web-hosting and local and long distance) and 30,000 residential customers
(mainly modem access and local and long distance). Current customers include
Boeing, TWA, Arch Coal, Emerson Electric, St. Louis University and Washington
University.
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Market
Data communications is one of the fastest growing segments of the
telecommunications market. Small and medium-sized businesses increasingly need
high-speed data/Internet connections to remain competitive. Further, the demand
for high-speed digital communications services for remote local area network,
which is referred to as LAN, access has grown rapidly. Many businesses now
desire to allow employees access to their local area networks from home to
improve employee productivity and reduce operating costs.
Primary Network is building a regional presence in the Midwestern
United States as a communications provider by focusing on Tier 2 and Tier 3
cities. These cities and the surrounding areas accounted for over $29 billion in
telecommunications business in 1998 according to the FCC. The incumbent
telephone companies in these cities have realized almost all of this revenue due
to minimal market penetration by Competitive Local Exchange Carriers, which are
referred to as CLECs, which are local phone companies which compete for
customers with incumbent carriers, especially those that are data-focused, has
been minimal. In addition, because of the lack of competition from CLECs, the
incumbent phone companies have been slow to roll out sophisticated data services
and new platforms such as DSL and have neglected to provide adequate services to
smaller cities and, in particular, small to medium-sized businesses.
Primary Network Strategy
Primary Network has pursued an aggressive expansion strategy, rapidly
expanding its network while building a customer base of currently under-served
small and medium-sized businesses and residential customers. In each city in
which Primary Network offers service, Primary Network creates an ATM
Metropolitan Area Network, which is referred as a MAN, of connected central
office collocations. The MANs allow Primary Network to aggregate voice and data
traffic, thus enabling Primary Network to offer a suite of voice and data
services to business customers. Multiple customer offices in a given city may be
linked into a virtual private network carrying both voice and data that includes
remote or at-home workers.
Because of the advantages of its MANs, Primary Network offers services
to businesses, small office or home office workers and residential consumers
that previously had been available only to large enterprises. These services
include broadband access to the Internet or to private networks, remote access
to corporate data networks and low-cost long distance service over DSL. Primary
Network is able to customize its service to the needs of the user - each
business or consumer is able to choose the configuration that suits its needs
and budget. Primary Network believes that its ability to offer multiple service
options, and to price DSL within the range of consumers, gives it a competitive
advantage over other communications providers.
Primary Network has implemented an aggressive sales and marketing
campaign focused on small and medium-sized businesses, home-based businesses and
upscale
35
<PAGE>
residential users in its serviced markets. Primary Network has positioned its
brand name in its serviced markets through direct sales, direct marketing calls
and affinity marketing with print and direct mail advertising. Primary Network's
marketing campaigns focus on educating potential customers on the cost savings
and advantages of Primary Network's converged services. Further, as a means of
growing its customer base, Primary Network has pursued acquisitions of existing
ISPs in the telecommunications market. Such acquisitions give Primary Network
the ability to market its complete services to the acquired customer base.
Primary Network Services
Primary Network has developed a network which utilizes broadband
network services, and has been an industry leader in the Midwest with respect to
advancing broadband technology. Currently, Primary Network's broadband service
offerings are offered via DSL. Primary Network's service offerings are tailored
to meet the specific needs of its target market, specifically small and
medium-sized businesses, with both bundled and individual services.
The Primary Network service offerings are intended to provide customers
with a comprehensive system in order to meet the varying needs of the data and
voice communications market. Primary Network's services include, or will
include: three specific types of DSL services, each with several options,
including ADSL, SDSL and IDSL; long distance Voice over DSL (VoDSL); local and
long distance voice services; T-1 and Fractional T-1; Frame Relay; ISDN (dial-up
and dedicated); and 56k Modem connections (dial-up and dedicated). Primary
Network also offers web hosting, firewalling and other security services and
products, collocation services, hardware for use with many of the Internet
access services, domain name registration and e-mail services.
Sales and Client Care
The key aspects of Primary Network's sales efforts are consultative
selling and long-term customer relationships. In order to accomplish this, all
Primary Network sales people go through a two-week training period in
telecommunications and Internet technology and in the specific services offered
by Primary Network. Further, client development representatives go beyond the
initial sales process to manage Primary Network's relationship with each client;
these representatives focus on identifying the evolving telecommunications
requirements of clients and assisting with "upselling" a broader array of more
comprehensive telecommunications services. Commission plans and incentive
programs are designed to reward and retain top performers and to encourage
strong client relationships.
A local sales force penetrates each of Primary Network's four market
regions. As of March 31, 2000, Primary Network's sales and sales-support staff
consisted of 86 people. In addition to the local direct sales forces, Primary
Network has several third-party agencies which sell Primary Network's services.
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<PAGE>
All of Primary Network's customers receive the benefit of a single
point of contact for implementation, maintenance and billing. Primary Network's
network operations center provides active and requested maintenance services 24
hours a day, 7 days a week. A trouble-ticket management system, which routes
technical problems to the appropriate service personnel, integrates the network
operations center and the field service organization. The fully staffed 24-hour
operations center enhances Primary Network's ability to provide active
maintenance.
Customer Management System
Primary Network uses a proprietary, internally developed system to
manage all aspects of a customer's account, from initial order throughout the
life of the account. The system was developed over a five-year period and
utilizes a common database that can be accessed by all departments via a
web-based browser interface. Customer orders are provisioned in a highly
automated fashion. For certain types of orders, such as resold local and long
distance, secondary systems are also used for specific tasks, with the relevant
information transmitted back into the centralized database. The system allows
customer service representatives to view the history of each customer account,
including any calls to technical support and all relevant billing history.
Technical support representatives use the system to track calls and initiate
trouble tickets which are transferred to the appropriate service departments for
resolution. Reports are available to management on sales, customer counts and
accounts receivable. The system is also used to bill customers and generate
invoices daily.
Network
Primary Network has developed an infrastructure that is designed to
allow for maximum efficiency on a large scale broadband packet network. Each
metropolitan area occupied by Primary Network is linked through an ATM MAN, and
each of these is connected to Primary Network's regional ATM network. Primary
Network is one of the few communications providers with fully integrated,
end-to-end ATM transmission ability. Primary Network is one of the first
companies in the country using Lucent Technologies' new Stinger platform as the
delivery method for its broadband services. Stinger is the leader in the new
generation of platforms with the density, inter-operability and back-end
connectivity necessary for a cost-effective deployment of all types of DSL,
traditional T1s and advanced services such as voice over DSL. All of these
factors give Primary Network a number of significant advantages over competitors
in the Midwest. Because of this homogeneous network, Primary Network is able to
utilize network management tools which cleanly and effectively touch every
customer and every network component. Primary Network has a level of control
over its network that enables it to quickly identify and correct any service
problem which might arise. Primary Network further benefits from the newness of
its network. Unlike many communications providers that still utilize outdated
legacy equipment, Primary Network's network was built from the start to deliver
the next generation of converged services.
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<PAGE>
Competition
Primary Network faces competition, or potential competition, from
companies with long operating histories, greater name recognition and
substantially greater financial, technical and marketing resources. Many
competitors are offering, or may soon offer, technologies or services that
directly compete with Primary Network's offerings. Competitive offerings may
include technologies such as wireless data systems, cable modems or satellite
communication systems that provide performance advantages in some respects over
DSL and other technologies that use existing copper telephone wires.
Southwestern Bell and Ameritech are currently Primary Network's closest
competitors. It is expected that Southwestern Bell will be the key competitor in
delivering communications services to end users in the Midwest. Southwestern
Bell has existing networks in local areas and across major metropolitan areas in
Primary Network's targeted markets. Southwestern Bell currently serves
substantially all of the customers in these markets and it has established its
own Internet service provider business. Primary Network has succeeded in gaining
customers in Southwestern Bell and Ameritech territory through fair pricing, a
strong focus on customer service, branding efforts and the inherent quality of
its network.
Most cable companies in the Midwest target the residential market with
their cable-based brand of Internet access. To counter this, Primary Network
focuses its marketing efforts on businesses in the region, and will only compete
against the cable companies in the residential arena for telecommuting and
work-at-home applications. Primary Network expects to compete with cable
companies based on the technical advantages of DSL technology over cable modems
and Primary Network's commitment to both service and reliability.
Primary Network believes that its direct sales approach, the depth of
service coverage in all of the targeted markets and Primary Network's ability to
provide additional services will positively impact its ability to compete with
other DSL providers in its covered market. Bundled services provide Primary
Network's customers with comprehensive data transport and networking solutions,
which may make Primary Network a more attractive alternative than many of its
competitors.
Regulatory Approvals
As a competitive local exchange carrier, Primary Network is subject to
regulation at the federal and state levels. Federal and state regulations and
legislation have a direct impact on Primary Network's business and operations.
The FCC exercises jurisdiction over all facilities and services offered by
carriers providing interstate or international communications. The Public
Service Commission in each state oversees the regulation of facilities and
services related to providing intrastate communications. In particular, state
regulatory commissions have substantial oversight over the provision of
interconnection agreements between incumbent phone companies and competitive
phone companies in order to ensure non-discriminatory network access to such
incumbent
38
<PAGE>
telephone companies. In addition, both state and federal regulators share
responsibility for implementing and enforcing the policies of the
Telecommunications Act of 1996.
In compliance with these federal and state regulations, Primary Network
has filed tariffs (schedules of rates and terms of service) for authorization by
the FCC. Primary Network also has collocation agreements with the incumbent
telephone companies in Arkansas, Illinois, Kansas, Missouri, Oklahoma and
Tennessee that allow Primary Network access to central offices throughout its
markets. In Indiana, Primary Network has accessed collocation space under the
FCC tariffs. In addition, Primary Network has interconnection agreements with
the incumbent telephone companies in each of these states. These interconnection
and collocation agreements have been filed with and approved by the Public
Service Commissions in each of these states, except with respect to Indiana and
Kentucky, where the interconnection agreements are still pending. Primary
Network has filed interconnection and collocation agreements it has made with
incumbent telephone companies in Kentucky, Louisiana, Mississippi, North
Carolina and South Carolina, and is awaiting approval from their Public Service
Commissions.
Internet services are not currently subject to direct regulation by the
FCC or any other telecommunications agency.
Employees
As of March 31, 2000, Primary Network had 382 employees, employed in
engineering, sales, marketing, customer support and related activities, and
general and administrative functions. This does not include temporary personnel
or consultants that Primary Network retains from time to time. The employees are
not represented by a labor union, and relations with employees are believed to
be good. Primary Network believes that future success will depend in part on a
continued ability to attract, hire and retain qualified personnel, as
competition for such personnel is intense.
Facilities
Primary Network is headquartered in St. Louis, Missouri, with personnel
in four buildings with approximately 18,000 square feet of combined office space
and a 1,091 square-foot network operations center. In addition, Primary Network
has secured a lease on a new 95,007 square-foot building near the current
network operations center. All St. Louis operations, except for the network
operations center, will be consolidated to this new building on or about June
15, 2000.
Primary Network has leased premises for local network operations
centers in Kansas City, Missouri, Springfield, Missouri and Tulsa, Oklahoma, and
for sales offices in Overland Park, Kansas, Swansea, Illinois, Tulsa, Oklahoma
and Springfield, Missouri. These facilities are each occupied under separate
leases, which expire over various terms; there are approximately three years
remaining on the term of each such lease. Primary Network leases rack space in a
number of business locations to house equipment needed to serve predominately
modem and Integrated Services Digital Network, which is
39
<PAGE>
referred to as ISDN, customers. In addition, Primary Network leases three small
retail stores and owns one other retail store in the St. Louis metropolitan
area. These are located in O'Fallon, Missouri, Ladue, Missouri, Edwardsville,
Illinois, and East St. Louis, Illinois, respectively.
Primary Network also leases space in a number of Southwestern Bell and
Ameritech central offices under specific collocation agreements. While the terms
of these leases are perpetual, the productive use of our facilities in these
central offices are subject to the terms of federal and state tariffs,
regulatory decisions and our interconnection agreements with Southwestern Bell
and Ameritech. Primary Network will increase central office space as the needs
of its expanding network demand.
Security Ownership of Principal Stockholders and Management of Primary
Network
The following table sets forth certain information with respect to the
beneficial ownership of Primary Network common stock as of May 9, 2000,
including, (i) each stockholder who is known by Primary Network to beneficially
own 5% or more of the outstanding shares of Primary Network common stock, (ii)
each director and Named Executive Officer of Primary Network and (iii) all
directors and executive officers of Primary Network as a group. Unless otherwise
indicated, the shares of Primary Network common stock are owned directly and the
indicated person has sole voting and investment power.
40
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Beneficial Number of Shares of Common Stock Percent of Common
Owners Beneficially Owned (1) Stock
------ ---------------------- -----
<S> <C> <C>
Marko Dimitrijevic (2) 25,691,598 40.40%
2601 South Bayshore Drive
Suite 1700
Miami, FL 33133
John Malloy (3) 25,691,598 40.40%
c/o Everest Capital Ltd.
Bank of Butterfield Building
6th Floor
65 Front Street
P.O. HM 2458
Hamilton HM JX Bermuda
EC Primary, L.L.C. 18,252,280 28.70%
c/o Everest Capital Ltd.
Bank of Butterfield Building
6th Floor
65 Front Street
P.O. HM 2458
Hamilton HM JX Bermuda
Quantum Emerging Growth Partners 7,439,318 11.70%
c/o Everest Capital Ltd.
Bank of Butterfield Building
6th Floor
65 Front Street
P.O. HM 2458
Hamilton HM JX Bermuda
Carol D. Matthews 4,121,691 6.48%
251 Larimore Valley
Chesterfield, Missouri 63005
Brian L. Matthews 4,092,246 6.43%
251 Larimore Valley
Chesterfield, Missouri 63005
Charles F. Wiegert 3,932,800 6.18%
8640 Green Springs
St. Louis, Missouri 63123
Welton Brison 3,218,489 5.06%
1912 Sir Lancelot
St. Louis, Missouri 63146
</TABLE>
- ----------------
1 Includes any shares of Primary Network common stock which the beneficial
owner has the right to acquire beneficial ownership of within 60 days,
including the exercise of options, warrants or other rights, the conversion
of a security or pursuant to the power to revoke a trust, discretionary
account or similar arrangement.
2 Includes the shares controlled by EC Primary, L.L.C. and Quantum Emerging
Growth Partners.
3 Includes the shares controlled by EC Primary, L.L.C. and Quantum Emerging
Growth Partners.
41
<PAGE>
<TABLE>
<CAPTION>
Name and Address of Beneficial Number of Shares of Common Stock Percent of Common
Owners Beneficially Owned (1) Stock
------ ---------------------- -----
<S> <C> <C>
Tom Hesterman 2,625,894 4.11%
Lenard Tessler (4) 2,183,189 3.43%
Richard Phillips 1,663,535 2.62%
Alan Schrager 1,416,2645 2.18%
Blake Ashby (6) 866,381 1.36%
Richard Sartori (7) 407,111 *
Mike Torrence (8) 110,000 *
Tony Hartke (9) 75,247 *
All Officers and Directors together (10) 42,349,954 64.3%
* represents less than 1%
</TABLE>
- --------------------
4 Includes the shares controlled by TGV Partners and TGV/Primary Investors
L.L.C.
5 Includes 173,007 shares of Series A convertible preferred stock, 680,000
shares of Series B convertible preferred stock and warrants to purchase
520,000 shares of Series B convertible preferred stock.
6 Includes 300,000 shares of Primary Network common stock which may be
acquired by Mr. Ashby within 60 days by the exercise of options.
7 Primary Network and Richard Sartori are presently in dispute as to the
number of options that are due Mr. Sartori.
8 Includes 100,000 shares of Primary Network common stock which may be
acquired by Mr. Torrence within 60 days by the exercise of options.
9 Includes 50,576 shares of Primary Network common stock which may be
acquired by Mr. Hartke within 60 days by the exercise of options.
10 Includes 10 directors and five officers.
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<PAGE>
Primary Network Management's Discussion and Analysis of Financial Condition and
Results of Operations
Primary Network is an integrated communications provider offering data
and voice telecommunications services to both business and residential
customers. Primary Network is the successor corporation to CDM On-Line, Inc.,
and has been operational since June 1, 1999. A more detailed description of the
initial formation, organization and capitalization of Primary Network can be
found on pages 22-24 of Annex F of the Proxy Statement/Prospectus in the
footnotes to the September 30, 1999 audited financial statements of Primary
Network. This discussion of the financial condition of Primary Network will
analyze the financial statements of Primary Network and CDM On-Line for the
three years ending December 31, 1999. The following is a discussion of certain
factors affecting the operating results of Primary Network and CDM On-Line , as
predecessor to Primary Network, as well as a description of the liquidity and
capital resources of Primary Network. Based on Primary Network's initial
formation and September 30 fiscal year end, Primary Network has provided
financial comparisons for the following periods:
o The three months ended December 31, 1999 vs. the three months
ended December 31, 1998;
o The four months ended September 30, 1999 vs. the four months ended
September 30, 1998;
o The five months ended May 31, 1999 vs. the five months ended May
31, 1998;
o The twelve months ended December 31, 1999 vs. the twelve months
ended December 31, 1998; and
o The twelve months ended December 31, 1998 vs. the twelve months
ended December 31, 1997.
This discussion should be read along with the financial statements of
Primary Network and their notes, which can be found in Annex F of the Proxy
Statement/Prospectus. These results are not necessarily indicative of any future
results.
This discussion contains statements that plan for or anticipate the
future. Because these forward-looking statements include future risks and
uncertainties, there are factors that could cause actual results to differ
materially from those expressed or implied.
43
<PAGE>
Overview
Primary Network began providing dialup Internet connectivity and web
hosting in August 1995 and began offering ISDN and dedicated connectivity by May
1996. In December 1996 Primary Network began offering cell phone sales and
service on an agency basis. During the fourth quarter of 1999, Primary Network
began offering high-speed DSL service in St. Louis and Kansas City. Currently,
Primary Network provides DSL, high-speed Internet access and dialup modem access
in St. Louis, Kansas City and Springfield, Missouri; Tulsa and Oklahoma City,
Oklahoma; and Metro East, Illinois.
Primary Network's 1997 revenues were generated from sales of
communications services consisting primarily of dialup and dedicated Internet,
web hosting and web design, agency cell phone sales and agency long distance
services. In 1998, these revenue streams grew through added sales and marketing
activity. In 1999, Primary Network discontinued the operation of its web-design
services.
During 1997 and 1998, Primary Network expanded significantly with the
installation of Network Access Points for dialup connectivity within the Kansas
City area and a number of the smaller cities surrounding St. Louis. During 1998
and 1999, Primary Network continued this expansion, adding network access points
in Springfield, Missouri and Tulsa, Oklahoma, and acquiring competing Internet
Service Providers in St. Louis, Kansas City, Springfield and Tulsa. Primary
Network also opened a total of 35 collocation sites for DSL service by the end
of 1999. As expected, both cost of operating revenues and selling, general and
administrative expenses increased as many costs of providing service were
initially duplicated through the acquisitions before efficiencies could be
realized. In addition, Primary Network incurred significant sales and marketing
costs to establish an initial base of customers in new markets.
Building and expanding its business has required and will continue to
require Primary Network to incur significant capital expenditures primarily
consisting of the costs of building out collocations and the purchase of
associated equipment. As part of its network growth strategy, Primary Network
built out and installed DSL collocations in each of the markets Primary Network
does business in while leasing the means of transporting voice and data traffic
from these switches to its customers' telephones or other equipment. Primary
Network believes this facilities-based strategy, while initially increasing its
level of capital expenditures and operating losses, will enhance its long-term
financial performance.
Primary Network has experienced operating losses and generated negative
cash flow from operations since inception and expects to continue to generate
negative cash flow from operations for the foreseeable future while Primary
Network continues to expand its network and develop its product offerings and
customer base. Primary Network cannot ensure that its revenue or customer base
will grow or that Primary Network will be able to achieve or sustain positive
cash flow from operations.
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<PAGE>
Results of Operations
Three Months Ended December 31, 1999 vs. Three Months Ended December
31, 1998
Total Operating Revenues
Total operating revenues, which includes access revenues,
communications revenues, retail revenues and other revenues, increased to
$4,253,513 for the three months ended December 31, 1999 as compared to
$1,309,629 for the three months ended December 31, 1998.
Access revenues increased to $2,631,621 for the three months ended
December 31, 1999 as compared to $885,017 for the three months ended December
31, 1998. The 197% increase was the result of sales increases through existing
channels and the purchase of several Internet Service Providers, which are
referred to as ISPs, prior to and during the period. Communications revenues
increased to $1,143,165 for the three months ended December 31, 1999 as compared
to $0 for the three months ended December 31, 1998. The addition of this revenue
stream resulted from the Primary Network's purchase of a CLEC in June 1999. The
revenues were generated from sales of sales of communications services
consisting primarily of resale long distance, local phone service and the DSL
access service in both St. Louis and Kansas City.
Retail revenues increased to $242,177 for the three months ended
December 31, 1999 as compared to $220,746 for the three months ended December
31, 1998. The 9.7% increase was primarily the result of increased sales at four
retail stores.
Other revenues increased to $236,550 for the three months ended
December 31, 1999 as compared to $203,866 for the three months ended December
31, 1998. The 16% increase was primarily the result of increased equipment sales
and sales of higher cost products.
Cost of Operating Revenues
Cost of operating revenues, which includes cost of access,
communications, retail and other revenues, increased to $2,544,937 for the three
months ended December 31, 1999 as compared to $648,066 for the three months
ended December 31, 1998.
Cost of access revenues for the three months ended December 31, 1999
was $1,075,386 as compared to $337,216 for the three months ended December 31,
1998. Cost of access revenues as a percentage of access revenues increased to
40.9% for the three months ended December 31, 1999, from 38.1% for the three
months ended December 31, 1998. The increase in percentage was due to
inefficiencies in the network resulting from duplicative network elements
following certain acquisitions.
45
<PAGE>
Cost of communications revenues for the three months ended December 31,
1999 was $1,165,203 as compared to $0 for the three months ended December 31,
1998. As noted, Primary Network purchased a competitive phone company on June 1,
1999. Costs of communications are higher than total communications revenues
because of difficulties integrating the customer billing systems of Southwestern
Bell and Qwest with that of Primary Network and because of installation charges
by Southwestern Bell which differed from rates quoted in Southwestern Bell's
tariff schedule.
Cost of retail revenues for the three months ended December 31, 1999
was $97,296 as compared to $146,925 for the three months ended December 31,
1998. Cost of retail revenues as a percentage of retail revenues decreased to
40.2% for the three months ended December 31, 1999, from 66.6% for the three
months ended December 31, 1998. The improvement was the result of increased
margins on cellular equipment sales and shifting the cost of sales tax to the
consumer in 1999, as opposed to absorbing sales tax as a cost of goods in 1998.
Cost of other revenues for the three months ended December 31, 1999 was
$207,052 as compared to $163,925 for the three months ended December 31, 1998.
Cost of other revenues as a percentage of other revenues increased to 87.5% for
the three months ended December 31, 1999, from 80.4% for the three months ended
December 31, 1998. This increase resulted from continued use of free or
discounted equipment as an inducement to attract new customers, primarily with
respect to DSL service that was introduced in 1999.
Operations and Customer Support Expenses
Operations and customer support expenses for the three months ended
December 31, 1999 was $1,595,724 as compared to $193,032 for the three months
ended December 31, 1998, an increase in percentage of total revenues to 37.5%
for the three months ended December 31, 1999, from 14.7% for the three months
ended December 31, 1998. This increase is due to a number of factors, including
the acquisition of several ISPs, the addition of new employees during these
periods to help launch voice and DSL products, and the expansion of the
technical support center.
Cost of Sales and Marketing Expenses
Sales and marketing expenses for the three months ended December 31,
1999 was $1,342,581 as compared to $237,028 for the three months ended December
31, 1998. Sales and marketing expenses as a percentage of total revenues
increased to 31.6% for the three months ended December 31, 1999, from 18.1% for
the three months ended December 31, 1998. The increase was due to the purchase
of ISPs, the expansion of communications services to Springfield, Missouri and
Tulsa, Oklahoma, and the initial costs associated with building the sales force
and introducing our brand to these marketplaces.
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<PAGE>
General and Administrative Expenses
General and administrative expenses for the three months ended December
31, 1999, totaled $2,392,719, as compared to $420,720 for the three months ended
December 31, 1998. Cost of general and administrative expenses as a percentage
of total revenues increased to 56.3% for the three months ended December 31,
1999, from 32.1% for the three months ended December 31, 1998. This increase was
due largely to continued costs associated with the acquisition of several ISPs,
training personnel to provision and support products in multiple locations, as
well as the continued development of operational support systems for the new
products.
Retail Store Expenses
Retail store expenses for the three months ended December 31, 1999 was
$189,861 as compared to $298,308 for the three months ended December 31, 1998.
Retail store expenses as a percentage of retail revenues decreased to 78.4% for
the three months ended December 31, 1999, from 135.1% for the three months ended
December 31, 1998. The reduction was a result of a decrease in the direct sales
force attributable to selling cellular products and services, general staff
reductions and the closing of a retail location not used during the 1999 period.
Depreciation and Amortization
Depreciation and amortization for the three months ended December 31,
1999 was $2,813,809 as compared to $92,192 for the three months ended December
31, 1998. This increase is a result of goodwill associated with the acquisition
of the ISPs as well as placing additional assets in service in accordance with
Primary Network's planned build-out of its network.
Gross Interest Expense
Gross interest expense for three months ended December 31, 1999 totaled
$2,094,787, as compared to $19,331 for the three months ended December 31, 1998.
The increase in interest is due to interest expense accumulated by Primary
Network in connection with the 12% Senior Subordinated Discount Notes, issued on
June 1, 1999.
Total Net Loss
Primary Network incurred net losses of $8,378,874 and $569,395 for the
three months ended December 31, 1999 and 1998, respectively.
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<PAGE>
Four Months Ended September 30, 1999 vs. Four Months Ended September
30, 1998
Total Operating Revenues
Total operating revenues increased to $4,082,137 for the four months
ended September 30, 1999 as compared to $1,660,685 for the four months ended
September 30, 1998.
Access revenues increased to $2,712,058 for the four months ended
September 30, 1999 as compared to $1,115,024 for the four months ended September
30, 1998. The 143% increase was primarily the result of acquisition of three
ISPs during the period, the acquisition of three ISPs during the first 5 months
of 1999, and growth in the existing customer base of Primary Network.
Communications revenues increased to $850,367 for the four months ended
September 30, 1999 as compared to $0 for the four months ended September 30,
1998. The addition of this revenue stream resulted from the Primary Network's
purchase of a CLEC in June 1999.
Retail revenues increased to $350,715 for the four months ended
September 30, 1999 as compared to $314,721 for the four months ended September
30, 1998. The 11.4% increase was primarily the result of increased sales at four
retail stores.
Other revenues decreased to $168,997 for the four months ended
September 30, 1999 as compared to $230,940 for the four months ended September
30, 1998. The 27% decrease was primarily the result of eliminating certain
installation fees and providing free equipment as an incentive to attract new
customers.
Cost of Operating Revenues
Cost of operating revenues for the four months ended September 30, 1999
was $2,102,573 as compared to $738,126 for the four months ended September 30,
1998.
Cost of access revenues for the four months ended September 30, 1999
was $947,293 as compared to $417,840 for the four months ended September 30,
1998. Cost of access revenues as a percentage of access revenues decreased to
34.9% for the four months ended September 30, 1999, from 37.5% for the four
months ended September 30, 1998. Savings were the result of additional
efficiencies of scale realized from revenue growth.
Cost of communications revenues for the four months ended September 30,
1999 was $903,846 as compared to $0 for the four months ended September 30,
1998. As noted, Primary Network purchased a CLEC on June 1, 1999. Costs are
higher than total communications revenues because of difficulties integrating
the customer billing systems of Southwestern Bell and Qwest with that of Primary
Network and because of installation
48
<PAGE>
charges by Southwestern Bell which differed from rates quoted in Southwestern
Bell's tariff schedule.
Cost of retail revenues for the four months ended September 30, 1999
was $141,734 as compared to $183,358 for the four months ended September 30,
1998. Cost of retail revenues as a percentage of retail revenues decreased to
40.4% for the four months ended September 30, 1999, from 58.3% for the four
months ended September 30, 1998. The improvement was the result of increased
margins on cellular equipment sales and shifting the sales tax cost on to
customers, as opposed to absorbing the sales tax as a cost of goods in 1998.
Cost of other revenues for the four months ended September 30, 1999 was
$109,700 as compared to $136,928 for the four months ended September 30, 1998.
Cost of other revenues as a percentage of other revenues increased to 64.9% for
the four months ended September 30, 1999, from 59.3% for the four months ended
September 30, 1998. This increase resulted from offering free or discounted
equipment in order to attract new customers.
Operations and Customer Support Expenses
Operations and customer support expenses for the four months ended
September 30, 1999 was $1,595,725 as compared to $241,295 for the four months
ended September 30, 1998, an increase in percentage of total revenues to 39.1%
for the four months ended September 30, 1999, from 14.5% for the four months
ended September 30, 1998. This increase is due to a number of factors, including
the acquisition of several ISPs, the addition of new employees during these
periods to help launch voice and DSL products, and the expansion of the
technical support center.
Sales and Marketing Expenses
Sales and marketing expenses for the four months ended September 30,
1999 was $1,342,581 as compared to $228,685 for the four months ended September
30, 1998. Sales and marketing expenses as a percentage of total revenues
increased to 32.9% for the four months ended September 30, 1999, from 13.8% for
the four months ended September 30, 1998. This increase was due to Primary
Network's expansion of communications services into the Kansas City market and
increased marketing costs associated with such expansion, as well as increased
spending on brand building for the DSL Accelerator product in existing markets.
General and Administrative Expenses
General and administrative expenses for the four months ended September
30, 1999 totaled $2,046,290, as compared to $318,537 for the four months ended
September 30, 1998. Cost of general and administrative expenses as a percentage
of total revenues increased to 50.1% for the four months ended September 30,
1999, from 19.2% for the four months ended September 30, 1998. This increase was
due largely to the acquisition
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of several ISPs and increased costs associated with entering new markets. In
addition, Primary Network increased the management staff and began developing
software for billing and provisioning for new products.
Retail Store Expenses
Retail store expenses for the four months ended September 30, 1999 was
$275,554 as compared to $298,665 for the four months ended September 30, 1998.
Retail store expenses as a percentage of retail revenues decreased to 78.6% for
the four months ended September 30, 1999, from 94.9% for the four months ended
September 30, 1998. The reduction was the result of a decrease in the direct
sales force responsible for selling cellular products and services.
Depreciation and Amortization
Depreciation and amortization for the four months ended September 30,
1999 was $1,766,901 as compared to $101,857 for the four months ended September
30, 1998. This increase is a result of goodwill associated with the acquisition
of several ISPs, as well as placing additional assets in service in accordance
with the planned build-out of its network.
Gross Interest Expense and Interest Income
Gross interest expense for four months ended September 30, 1999 totaled
$2,701,311, as compared to $91,919 for the four months ended September 30, 1998.
The increase in interest is due almost entirely to interest expense accumulated
from the 12% Senior Subordinated Discount Notes, issued on June 1, 1999.
Interest income was $694,227 during the four months ended September 30, 1999
compared to $22,783 for the four months ended September 30, 1998. The increase
resulted primarily from investment income arising from the investment of
proceeds of the 12% Senior Subordinated Discount Notes financing.
Total Net Loss
Primary Network incurred net losses of $7,308,703 and $270,642 for the
four months ended September 30, 1999 and 1998, respectively.
Five Months Ended May 31, 1999 vs. Five Months Ended May 31, 1998
Total Operating Revenues
Total operating revenues increased to $2,833,284 for the five months
ended May 31, 1999 as compared to $1,825,257 for the five months ended May 31,
1998. Total operating revenues consisted of access revenues, retail revenues and
other revenues; there were no communications revenues for five-month period
ending May 31, 1999.
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Total access revenues increased to $2,070,368 for the five months ended
May 31, 1999 as compared to $1,216,422 for the five months ended May 31, 1998.
The 70% increase was primarily due to an increase in the number of dialup and
access customers resulting from increased marketing and acquisition of three
ISPs.
Retail revenues increased to $518,124 for the five months ended May 31,
1999 as compared to $347,913 for the five months ended May 31, 1998. The 49%
increase was primarily the result of increased sales growth at four retail
stores.
Other revenues decreased to $244,792 for the five months ended May 31,
1999 as compared to $260,922 for the five months ended May 31, 1998. The 6%
decrease was primarily the result of a decrease in modem setup fees in order to
attract new customers.
Cost of Operating Revenues
Cost of operating revenues for the five months ended May 31, 1999 was
$1,074,695 as compared to $810,811 for the five months ended May 31, 1998. Cost
of access revenues for the five months ended May 31, 1999 was $614,441 as
compared to $429,378 for the five months ended May 31, 1998. Cost of access
revenues as a percentage of access revenues decreased to 29.7% for the five
months ended May 31, 1999, from 35.3% for the five months ended May 31, 1998.
Savings were realized as a result of increased efficiencies of scale and cost
effective management of both network and telecommunications circuits.
Cost of retail revenues for the five months ended May 31, 1999 was
$299,287 as compared to $199,707 for the five months ended May 31, 1998. Cost of
retail revenues as a percentage of retail revenues was essentially unchanged,
with cost of retail revenues marginally increasing to 57.8% for the five months
ended May 31, 1999, from 57.4% for the five months ended May 31, 1998.
Cost of other revenues for the five months ended May 31, 1999 was
$160,967 as compared to $181,726 for the five months ended May 31, 1998. Cost of
other revenues as a percentage of other revenues decreased to 65.8% for the five
months ended May 31, 1999 from 69.6% for the five months ended May 31, 1998.
Savings resulted from a decrease in the number of promotions designed to attract
new customers.
Operations and Customer Support Expenses
Operations and customer support expenses for the five months ended May
31, 1999 was $387,078 as compared to $237,265 for the five months ended May 31,
1998, an increase in percentage of total revenues to 13.7% for the five months
ended May 31, 1999, from 13% for the five months ended May 31, 1998. The
marginal increase in percentage of total revenues resulted from the need to
increase the customer care organization in anticipation of the acquisition of
several ISPs.
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Sales and Marketing Expenses
Sales and marketing expenses for the five months ended May 31, 1999 was
$377,952 as compared to $279,354 for the five months ended May 31, 1998. Sales
and marketing expenses as a percentage of total revenues decreased to 13.3% for
the five months ended May 31, 1999, from 15.3% for the five months ended May 31,
1998. Savings were realized as a result of spreading sales and marketing
management costs over a larger budget.
General and Administrative Expenses
General and administrative expenses for the five months ended May 31,
1999 totaled $978,661, as compared to $449,795 for the five months ended May 31,
1998. Cost of general and administrative expenses as a percentage of total
revenues increased to 34.5% for the five months ended May 31, 1999, from 24.6%
for the five months ended May 31, 1998. This increase was due to an increase in
stock compensation expenses to $391,000 for the five months ended May 31, 1999,
from $0 for the five months ended May 31, 1998. This increase is stock
compensation resulted from equity sold or granted to new employees in 1999.
Excluding of this increase in stock compensation expenses, general and
administrative expenses as a percentage of total sales decreased to 20.7% for
the five months ended May 31, 1999, from 24.6% for the five months ended May 31,
1998.
Retail Store Expenses
Retail store expenses for the five months ended May 31, 1999 was
$518,571 as compared to $416,164 for the five months ended May 31, 1998. Retail
store expenses as a percentage of retail revenues decreased to 100.1% for the
five months ended May 31, 1999, from 119.6% for the five months ended May 31,
1998. This decrease is the result of management's continued efforts towards
improving operating results for the retail stores.
Depreciation and Amortization
Depreciation and amortization for the five months ended May 31, 1999,
was $168,923 as compared to $69,013 for the five months ended May 31, 1998. This
increase is a result of placing additional assets in service in accordance with
Primary Network's planned build-out of its network.
Gross Interest Expense and Interest Income
Gross interest expense for five months ended May 31, 1999 totaled
$19,158, as compared to $79,731 for the five months ended May 31, 1998. This
decrease in interest expense is attributable to a conversion of a note from an
affiliated party to equity in order to reduce the debt of Primary Network.
Interest income was $8,671 during the five months ended May 31, 1999 compared to
$0 for the five months ended May 31, 1998.
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The increase resulted from loans made to affiliated parties and the subsequent
interest payments on such loans.
Total Net Loss
Primary Network incurred net losses of $763,691 and $394,081 for the
five months ended May 31, 1999 and 1998, respectively.
Twelve Months Ended December 31, 1999 vs. Twelve Months Ended December
31, 1998
Total Operating Revenues
Total operating revenues increased to $11,168,934 for the twelve-months
ended December 31, 1999 as compared to $4,795,571 for the twelve-months ended
December 31, 1998.
Access revenues increased to $7,414,047 for the twelve-months ended
December 31, 1999 as compared to $3,216,463 for the twelve-months ended December
31, 1998. The 131% increase was the result of sales increases through existing
channels and the acquisition of several ISPs during 1999.
Communications revenues were $1,993,532 for the twelve-months ended
December 31, 1999 as compared to $0 for the twelve-months ended December 31,
1998. The addition of this revenue stream resulted from the Primary Network's
purchase of a CLEC in June 1999. The revenue is attributable to resale long
distance, local phone service and the introduction of DSL access services in St.
Louis and Kansas City.
Retail revenues increased to $1,111,016 for the twelve-months ended
December 31, 1999 as compared to $883,380 for the twelve-months ended December
31, 1998. The 25.8% increase was primarily the result of increased sales at four
retail stores.
Other revenues decreased to $650,339 for the twelve-months ended
December 31, 1999 as compared to $695,728 for the twelve-months ended December
31, 1998. The 6.5% decline was primarily the result of initiating certain
promotions in 1999 aimed at attracting new customers in response to market
pressure.
Cost of Operating Revenues
Cost of operating revenues for the twelve-months ended December 31,
1999 was $5,722,205 as compared to $2,197,005 for the twelve-months ended
December 31, 1998.
Cost of access revenues for the twelve-months ended December 31, 1999
was $2,637,120 as compared to $1,184,433 for the twelve-months ended December
31, 1998. Cost of access revenues as a percentage of access revenues was
essentially unchanged, at 35.6% for the twelve-months ended December 31, 1999,
from 36.8% for the twelve-
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months ended December 31, 1998. Cost of access revenues increased in 1999 in the
final quarter due to several acquisitions. However, the aggregate percentage of
cost of access revenues as a percentage of access revenues was equivalent to the
1998 percentage for that period, primarily because Primary Network began
realizing the economies of scale resulting from the acquisitions of the ISPs.
Cost of communications revenues for the twelve-months ended December
31, 1999 was $2,069,049 as compared to $0 for the twelve-months ended December
31, 1998. As previously noted, Primary Network purchased a CLEC in June 1999.
Costs are higher than total communications revenues because of difficulties in
reconciling billings from Southwestern Bell and Qwest with the Primary Network's
own customer-billing system.
Cost of retail revenues for the twelve-months ended December 31, 1999
was $538,317 as compared to $529,992 for the twelve-months ended December 31,
1998. Cost of retail revenues as a percentage of retail revenues decreased to
48.5% for the twelve-months ended December 31, 1999, from 60% for the
twelve-months ended December 31, 1998. The improvement was the result of
increased margins on cellular equipment sales and shifting the cost of sales tax
to customers in 1999, as opposed to absorbing sales tax as a cost of goods in
1998.
Cost of other revenues for the twelve-months ended December 31, 1999
was $477,719 as compared to $482,580 for the twelve-months ended December 31,
1998. Cost of other revenues as a percentage of other revenues increased to
73.5% for the twelve-months ended December 31, 1999, from 69.4% for the
twelve-months ended December 31, 1998. This increase resulted from waiving
certain fees and providing free equipment in order to attract new customers.
Operations and Customer Support Expenses
Operations and customer support expenses for the twelve-months ended
December 31, 1999 was $3,578,527 as compared to $671,592 for the twelve-months
ended December 31, 1998, an increase in percentage of total revenues to 32.3%
for the twelve-months ended December 31, 1999, from 14.0% for the twelve-months
ended December 31, 1998. This increase is due to a number of factors, including
increases in support staff for voice and DSL products launched in the fourth
quarter of 1999, increased technical support service the acquisition of several
ISPs in the twelve-month period ending December 31, 1999 and the addition of new
employees to meet the demands of a growing network.
Sales and Marketing Expenses
Sales and marketing expenses for the twelve-months ended December 31,
1999 was $3,063,114 as compared to $745,067 for the twelve-months ended December
31, 1998. Sales and marketing expenses as a percentage of total revenues
increased to 27.7% for the twelve-months ended December 31, 1999, from 15.5% for
the twelve-months
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ended December 31, 1998. The increase was due to increased sales and marketing
costs associated with the expansion of Primary Network into several new markets
and the introduction of several new products during this period.
General and Administrative Expenses
General and administrative expenses for the twelve-months ended
December 31, 1999 totaled $5,417,670, as compared to $1,189,052 for the
twelve-months ended December 31, 1998. General and administrative expenses as a
percentage of total revenues increased to 48.5% for the twelve-months ended
December 31, 1999, from 24.8% for the twelve-months ended December 31, 1998.
This increase was due largely to increased costs associated with the acquisition
of several ISPs, continued development of operational support systems for new
products, increased costs associated with the expansion of services into several
new states, and additional costs associated with additional management
personnel.
Retail Store Expenses
Retail store expenses for the twelve-months ended December 31, 1999 was
$983,986 as compared to $1,013,136 for the twelve-months ended December 31,
1998. Retail store expenses as a percentage of retail revenues decreased to
88.6% for the twelve-months ended December 31, 1999, from 114.7% for the
twelve-months ended December 31, 1998. The reduction resulted from reductions in
the number of employees and operating efficiencies.
Twelve-Months Ended December 31, 1998 vs. Twelve-Months Ended December
31, 1997
Total Operating Revenues
Total operating revenues increased to $4,795,571 for the year ended
December 31, 1998 as compared to $2,575,552 for the year ended December 31,
1997. The 86% increase was primarily the result of the increase in access
revenues. Access revenues, which represented 67% of total operating revenues for
the year ended December 31, 1998, increased $1,720,226 or 115% from the year
ended December 31, 1997. In addition, revenues grew at three retail stores
established in 1997, and a fourth retail location was added in fourth quarter of
1998.
Cost of Operating Revenues
Cost of operating revenues for the year ended December 31, 1998 was
$2,197,005 as compared to $1,317,947 for the year ended December 31, 1997. The
67% increase is due to an increase in the amount of telephone circuits in
service and other installation and operational expenses associated with the
network expansion.
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Sales, General and Administrative Expenses
Sales, general and administrative expenses for the year ended December
31, 1998, totaled $2,605,711, a 45% increase over the $1,801,600 for the year
ended December 31, 1997. The increase is a result of increased costs
attributable to marketing initiatives, increased operational costs associated
with providing our services, and other costs associated with network expansion.
Retail Store Expenses
Retail store expenses for the year ended December 31, 1998 totaled
$1,013,136, a 31% increase over the $773,634 for the year ended December 31,
1997. This increase is attributable to opening a new retail store in 1998 and
increased costs at the other retail stores.
Depreciation and Amortization
Depreciation and amortization for the year ended December 31, 1998, was
$263,063 as compared to $233,073 for the year ended December 31, 1997. This
increase is a result of placing additional assets in service in accordance with
the planned network development, as well as the addition of the retail stores in
1997 and 1998.
Interest Expense
Interest expense for fiscal 1998 totaled $190,980, as compared to
$83,806 for fiscal 1997. Increase in interest expense is primarily attributable
to an increase in the interest rate charged, from the applicable federal rate in
1997 to a rate of 12% in 1998. This interest rate increase was partially offset
by a reduction in notes payables due to a partial debt forgiveness on the part
of an affiliated party. Primary Network had no interest income in either 1997 or
1998.
Total Net Losses
Primary Network incurred net losses of $1,234,118 and $1,442,803 for
the years ended December 31, 1998 and 1997, respectively.
Liquidity and Capital Resources
Primary Network's operations require substantial capital investment for
the purchase of communications equipment and the development and installation of
its network. Capital expenditures were $9,137,105 for the year ended December
31, 1999, $193,938 for the year ended December 31, 1998 and $340,899 for the
year ended December 31, 1997. Primary Network expects that it will continue to
require substantial amounts of capital for future expenditures such as
continuing the expansion of central offices into various states, purchasing the
equipment necessary to continue such expansion and constructing a new home
office in St. Louis.
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To date, Primary Network has financed its operations primarily through
a private placement of 12% Senior Subordinated Discount Notes due 2006 with an
aggregate principal amount of $84,473,948 in June 1999, which resulted in the
receipt of $53,000,000 by Primary Network. However, the substantial capital
investment required to initiate services and fund its operations has exceeded
Primary Network's operating cash flow. This negative cash flow from operations
results from the need to establish Primary Network's network in anticipation of
connecting revenue-generating customers. Primary Network expects to continue
recording negative cash flow from operations because of its network expansion
activities. Primary Network cannot assure you it will attain break-even cash
flow from operations in subsequent periods.
Because Primary Network expects that its available cash, including the
proceeds of the 12% Senior Subordinated Discount Notes offering in June 1999,
will not be adequate to fund its operating losses and planned capital
expenditures as currently projected, Primary Network will be required to raise
additional capital, the availability, timing and amount of which cannot be
predicted. Primary Network expects that it would be required to raise additional
capital through debt or equity financings, depending on market conditions, to
finance the continued development, commercial deployment and expansion of its
networks and for funding operating losses or to take advantage of unanticipated
opportunities. If Primary Network is unable to obtain required additional
capital or is required to obtain additional capital on terms less satisfactory
than its desire, Primary Network may be required to delay the expansion of its
business or take or forego actions, any or all of which could harm its business.
Mpower
Mpower is a growing communications company currently offering Internet
access, voice over DSL, local dial tone, long distance and other voice and data
services primarily to small and medium-size business customers. Mpower has
launched bundled voice and high-speed data services using DSL technology in all
of its current markets. Mpower has one of the broadest geographic service areas
of any competitive carrier providing local, long distance and data services,
with 446 incumbent carrier central office collocation sites as of March 31,
2000. Approximately 248 of Mpower's central office collocation sites are DSL
capable. Mpower currently delivers its services in the metropolitan areas of
Atlanta, Chicago, Las Vegas, southern Florida and selected areas of southern
California, including Los Angeles and San Diego. Mpower has established working
relationships with five incumbent carriers: Ameritech, BellSouth, GTE, PacBell
and Sprint. As of March 31, 2000, Mpower had 194,775 customer lines sold, of
which 168,786 lines were in service. To roll out its network and services on a
national basis, during 2000, Mpower plans to aggressively expand its network to
include over 800 central office collocation sites providing access to more than
35 million addressable lines.
Mpower was one of the first competitive carriers to implement a
strategy of building and owning the network equipment, known as "switches," that
controls how voice and data transmissions originate and terminate, while leasing
the telephone lines and cable over which the voice and data traffic are
transmitted. Mpower installs its network equipment at the site of the incumbent
carrier from whom it rents standard
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telephone lines. Mpower believes that this strategy has allowed it to serve a
broad geographic area at a comparatively low cost while maintaining control of
the access to its customers. Having executed its strategy in the markets it
currently serves, Mpower believes that it is well-positioned to expand into
additional markets to serve the growing demand from small and medium-size
business customers for communications services.
Mpower's legal corporate name is currently MGC Communications, Inc. In
connection with its national expansion, Mpower has commenced doing business
under the name "Mpower Communications." Upon receiving approval of its
stockholders at the next annual stockholders' meeting, Mpower will formally
change its name to "Mpower Communications Corp."
Additional information concerning Mpower is included in Mpower's
reports filed under the Exchange Act that are incorporated by reference in this
Proxy Statement/Prospectus. See "Where You Can Find More Information" on page
114.
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THE MERGER
Background of the Merger
In January 2000, Jim Miller, the high yield research analyst for Bear,
Stearns & Co., Inc., suggested that Gregg Clevenger, Mpower's Senior Vice
President for Corporate Development, and Alan Schrager, Primary Network's chief
financial officer, discuss the possible acquisition by Mpower of Primary
Network. The first contact between Mpower and Primary Network took place in the
form of a conference call on January 26, 2000. During the conference call, Mr.
Clevenger and Mr. Schrager agreed to explore the possibility of such a
transaction. After the call, Mr. Schrager briefed each member of the Primary
Network board of directors on the details of the conference call.
On January 31, 2000, Mpower and Primary Network executed a
confidentiality agreement concerning confidential and proprietary information of
both parties.
On February 15, 2000, Mr. Clevenger, John Boersma, Neil Hediger and Dan
Blank of Mpower traveled to St. Louis to meet with various executives of Primary
Network to discuss Primary Network's business. Mr. Schrager briefed each member
of the Primary Network board of directors on the details of the meeting with the
Mpower representatives.
On February 23, 2000, Bear Stearns began assisting Mpower in evaluating
a possible transaction.
On February 26, 2000, legal counsel for Mpower provided Primary Network
with drafts of a merger agreement and related documents.
From February 28, 2000 through March 3, 2000, Mpower and its legal,
accounting and financial advisors conducted due diligence in St. Louis and met
with Primary Network management and its legal and financial advisors. On
February 28, Rolla Huff, chief executive officer of Mpower, and other Mpower
executives met with Primary Network senior management to explain Mpower's
business. At the same time, Houlihan Lokey began assisting Primary Network in
evaluating a possible transaction and conducted due diligence with regard to the
fairness of the possible transaction from a financial point of view. On March 2,
2000, Mr. Clevenger accompanied Mr. Schrager and Rich Phillips to Las Vegas so
that Mr. Schrager and Mr. Phillips could examine Mpower's Las Vegas facilities
and meet with various Mpower executives based in the Las Vegas facilities.
During this time period, Mpower and its legal representatives discussed with
Primary Network and its legal representatives the possible terms of the merger
agreement and related documents which each might be prepared to recommend to
their respective boards for approval. During these meetings and telephone calls,
the parties discussed the principal terms for these agreements, including the
merger consideration, the representation and warranties, covenants, termination
provisions, conditions to closing and voting agreements with the major
stockholders of Primary Network. Mpower and Primary Network and their legal
advisors continued these discussions in New York City on March 4, 2000. During
this time, Mr. Schrager briefed
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each member of the board of directors of Primary Network on the details of the
meetings and negotiations.
On March 5, 2000, Mr. Clevenger and other representatives of Mpower
traveled to St. Louis for further meetings with Primary Network management to
discuss further due diligence and possibilities for the integration of the two
companies. After the meeting, Mr. Schrager briefed each member of the board of
directors of Primary Network on the details on the meetings with the Mpower
representatives.
On March 6, 2000, Mr. Huff and Mr. Clevenger called Mr. Schrager to
inform him that Mpower was no longer interested in considering a transaction
with Primary Network at that time. After the call, Mr. Schrager informed each
member of the board of directors of Primary Network of the details of the call.
On March 27, 2000, Mr. Clevenger and Mr. Schrager reinitiated
discussions about the possible merger of Primary Network and Mpower. After the
call, Mr. Schrager briefed each member of the board of directors of Primary
Network on the details of the call.
Between March 28, 2000 and April 17, 2000, Mpower conducted additional
due diligence regarding Primary Network's business. Representatives of Mpower
and Primary Network and their respective legal counsel discussed and drafted the
terms of the merger agreement and related documents. During this time, Mr.
Schrager briefed each member of the board of directors of Primary Network on the
negotiations of the terms of the merger agreement and related documents.
On April 14, Mpower's board of directors met telephonically to consider
a transaction with Primary Network. Mpower's management and legal and financial
advisors made a presentation to the board regarding the proposed terms of the
merger and the effects of the combination on Mpower. After discussion, the
Mpower board unanimously approved the merger and the issuance of the shares
contemplated by the Merger Agreement.
On the evening of April 16, 2000, the Primary Network board met to
consider a transaction with Mpower. Primary Network's management and legal and
financial advisors made a presentation to the board regarding the proposed terms
of the merger and the effects of the combination on Primary Network. The Primary
Network board was advised that Houlihan Lokey's opinion would most likely be
that the exchange ratio provided for in the merger agreement was fair to the
stockholders of Primary Network from a financial point of view. Mr. Schrager
informed the board members of his discussion with Houlihan Lokey. After
discussion, the Primary Network board unanimously approved the merger.
Early in the morning of April, 17, 2000, the parties signed the merger
agreement and the related documents. The transaction was announced before the
opening of the market on April 17, 2000.
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On April 19, 2000, Houlihan Lokey delivered to the board of Primary
Network a written opinion that the exchange ratio provided for in the merger
agreement was fair to the stockholders of Primary Network from a financial point
of view.
Opinion of Houlihan Lokey
Pursuant to the terms of a letter agreement between Houlihan Lokey and
Primary Network, dated March 2, 2000, Houlihan Lokey was retained by the Primary
Network board of directors to analyze the fairness of the consideration to be
received by stockholders of Primary Network in connection with the merger from a
financial point of view. Houlihan Lokey is a nationally recognized investment
banking firm that provides financial advisory services in connection with
mergers and acquisitions, leveraged buyouts, business valuations for a variety
of regulatory and planning purposes, recapitalizations, financial
restructurings, and private placements of debt and equity securities.
Primary Network agreed to pay Houlihan Lokey a fee of $125,000, plus
reasonable out-of-pocket expenses, for its preparation and delivery of the
fairness opinion. No portion of Houlihan Lokey's fee is contingent upon the
successful completion of the merger.
Primary Network's board did not limit Houlihan Lokey in any way in the
investigations it made or the procedures it followed in rendering its opinion.
Primary Network retained Houlihan Lokey solely to deliver its fairness
opinion. Primary Network agreed to indemnify Houlihan Lokey and its affiliates
against certain liabilities, including liabilities under federal securities laws
that arise out of the engagement of Houlihan Lokey. The full text of Houlihan
Lokey's opinion, which sets forth the assumptions made, general procedures
followed, factors considered and limitations on the review undertaken by
Houlihan Lokey in rendering its opinion, is attached as Annex B and is
incorporated herein by reference. We urge you to read the opinion in its
entirety.
Houlihan Lokey did not, and was not requested by Primary Network to,
make any recommendations as to the form or amount of consideration to be
received by the Primary Network stockholders, the public market values or
realizable value of Mpower common stock given as consideration in the merger, or
the prices at which Mpower common stock may trade in the future following the
merger, and does not express any opinion as to the fairness of any aspect of the
merger not expressly addressed in its fairness opinion.
In arriving at its opinion, Houlihan Lokey:
1. met with certain members of the senior management of Primary
Network to discuss the operations, financial condition, future
prospects and projected operations and performance of Primary
Network;
2. visited certain facilities and business offices of Primary
Network;
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3. reviewed unaudited interim financial statements for the twelve
months ended February 29, 2000, which Primary Network's management
had identified as being the most current financial statements
available;
4. reviewed a summary term sheet relating to the merger, furnished by
Primary Network's management;
5. reviewed forecasts and projections prepared by Primary Network's
management with respect to Primary Network for the years ending
December 31, 2000 through 2007;
6. reviewed the historical market prices and trading volume for
Mpower's public securities;
7. reviewed certain other publicly available financial data for
certain companies that Houlihan Lokey deemed comparable to Primary
Network, and publicly available prices and premiums paid in other
transactions that Houlihan Lokey considered similar to the merger;
8. reviewed drafts of certain documents pertaining to the merger;
including
i) the Agreement and Plan of Merger by and among Mpower
Communications Corp., Mpower Merger Sub, Inc. and Primary
Network Holdings, Inc. dated as of April 17, 2000; and
ii) the Shareholders Agreement by and among Mpower Communications
Corp., Mpower Merger Sub, Inc. Primary Network Holdings, Inc.
and the persons named as Principal Shareholders on the
signature pages of such Agreement dated April 17, 2000; and
9. conducted such other studies, analyses and inquiries as Houlihan
Lokey have deemed appropriate.
In connection with its review, Houlihan Lokey:
o did not assume any responsibility for independent verification of
any of the foregoing information and relied upon its being
complete and accurate in all material respects;
o assumed that the financial forecasts had been reasonably prepared
on bases reflecting the best currently available estimates and
judgments of Primary Network management as to the future financial
performance of Primary Network;
o did not make an independent evaluation or appraisal of the assets
or liabilities (contingent or otherwise) of Primary Network; and
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o was not furnished with any evaluations or appraisals of the assets
or liabilities (contingent or otherwise) of Primary Network.
In addition, Houlihan Lokey was not requested to, and did not, solicit
third-party indications of interest in acquiring all or any part of Primary
Network. Houlihan Lokey did not express any opinion as to the actual value of
shares of Primary Network following the acquisition or the prices at which
shares may be purchased or sold subsequent to the merger. The Houlihan Lokey
opinion was necessarily based upon financial, economic, market and other
conditions as they existed and could be evaluated on the date of the opinion.
In preparing its opinion, Houlihan Lokey performed a variety of
financial and comparative analyses. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to partial analysis or
summary description. Houlihan Lokey believes that its analyses must be
considered as a whole and that selected portions of its analyses and portions of
the factors considered by it, without considering all analyses and factors,
could create a misleading view of the processes underlying its opinion. In
performing its analyses, Houlihan Lokey made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the control of Primary Network. The analyses
performed by Houlihan Lokey are not necessarily indicative of actual values or
actual future results, which may be significantly more or less favorable than
suggested by these analyses. In addition, analyses relating to the value of the
businesses or assets do not purport to be appraisals or to necessarily reflect
the prices at which businesses or assets may be actually sold. The analyses
performed were prepared solely as part of Houlihan Lokey's analysis of the
consideration to be received by stockholders of Primary Network from a financial
point of view, and were provided to the Primary Network directors in connection
with the delivery of its opinion.
In assessing the financial fairness of the consideration to be received
by stockholders of Primary Network, Houlihan Lokey valued the common equity of
Primary Network using widely accepted valuation methodologies and compared the
results of such analyses with the value of the consideration to be received by
the stockholders of Primary Network. The following is a summary of the material
financial analyses performed by Houlihan Lokey in connection with rendering its
fairness opinion to the Primary Network board of directors. The summary of the
financial analyses is not a complete description of all of the analyses
performed by Houlihan Lokey. The Houlihan Lokey opinion is based upon the
totality of the various analyses performed by Houlihan Lokey and no particular
portion of the analyses has any merit standing alone.
Valuation of Primary Network Holdings, Inc.
To determine the valuation of Primary Network, Houlihan Lokey employed
three widely used valuation analyses: the comparable companies analysis, the
discounted cash flow analysis and the comparable transactions analysis.
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Comparable Companies Analysis. Using publicly available information,
Houlihan Lokey analyzed, among other matters, the total capitalization and
trading multiples of Primary Network and selected three tiers of publicly traded
internet service providers primarily targeting (i) business customers, (ii)
business and residential customers and (iii) residential customers:
<TABLE>
<CAPTION>
Tier I - Business Tier II - Business/Residential Tier III - Residential
- ----------------- ------------------------------ ----------------------
<S> <C> <C>
o DSL.net o At Home Corporation o America Online, Inc.
o Network Access Solutions o Concentric Corporation o Earthlink Network, Inc.
o Network Plus Corporation o Covad Communications Group o Internet America
o PSINet, Inc. o Flashnet Communications o Prodigy
o Rhythms Netconnections, o Log On America, Inc.
Inc.
o Verio Inc. o Mpower Communications Corp.
o Mindspring Enterprises, Inc.
o Northpoint Communications
o Onemain.com
o RMI Net Inc.
o Voyager.net, Inc.
</TABLE>
The purpose of the comparable company analysis was to establish a range
for the potential equity value of Primary Network. This was accomplished by
applying appropriate risk-adjusted multiples to various cash flow and other
operational metrics of comparative companies. Earnings, cash flow and subscriber
multiples were calculated for these comparative companies based upon daily
trading prices, and a comparative risk analysis between Primary Network and the
comparative companies formed the basis for the selection of the risk-adjusted
multiple for Primary Network. The risk analysis incorporated both quantitative
and qualitative risk factors which relate to, among other things, the nature of
the industry in which Primary Network and the other comparative companies are
engaged.
Houlihan Lokey calculated specific multiples for the comparable
companies. The table below summarizes selected valuation multiples used by
Houlihan Lokey for Primary Network:
Valuation Multiple Selected Multiple
------------------ -----------------
Enterprise Value / Last 12 Months Revenues 8.0
Enterprise Value / Current Run Rate Revenues 6.0
Enterprise Value / Estimated 2000 Revenues 3.5
Enterprise Value / High Speed Business Subscriber $800,000
Enterprise Value / Business Subscriber $3,000
Enterprise Value / Residential Subscriber $250
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Enterprise Value, as referred to above and otherwise referred to
herein, reflects the total value of an company, including both debt and equity.
In sum, the comparable company analyses resulted in indications of enterprise
value for Primary Network in the range of approximately $110 million to $124
million.
Discounted Cash Flow Analysis. Houlihan Lokey employed a discounted
cash flow analysis of the after-tax free cash flows projected by Primary Network
management and the terminal value for Primary Network at the end of the forecast
period. The purpose of the discounted cash flow analysis was to establish a
range for the potential equity value of Primary Network by determining a range
for the net present value of Primary Network's projected future cash flows.
Houlihan Lokey first determined the discounted, projected, after-tax cash flows
of Primary Network through December 31, 2007 using discount rates ranging from
30 percent to 40 percent. Houlihan Lokey then added to the present value of the
cash flows the terminal value of Primary Network at December 31, 2007 using a
range of exit EBITDA multiples of 8.0x to 10.0x, discounted back at the same
discount rate to represent a present value. The discount rate used to calculate
the present value of the cash flows and the terminal value was developed through
an analysis of the rates of return on alternative investment opportunities in
comparative companies.
In sum, the discounted cash flow analyses resulted in indications of
enterprise value which had a midpoint of approximately $122 million for Primary
Network.
Comparable Transaction Analysis. Houlihan Lokey reviewed and compared
selected precedent transactions in the communications industry in which
Primary Network operates that it deemed relevant to its analysis in order to
compare the publicly available financial terms of those transactions with the
terms provided for in the merger agreement.
Houlihan Lokey reviewed the approximately 20 announced transactions of
companies considered to be comparable to Primary Network. Observed enterprise
value to latest twelve months revenue transaction multiples ranged from 0.2x to
4.7x with a median of 2.4x.
The purpose of the comparable transaction analysis was to establish a
range for the potential equity value of Primary Network by applying, to certain
projected operating results of Primary Network that are commonly used in the
public equity markets to value companies in Primary Network's industry, a range
of multiples. These multiples are determined by dividing the aggregate
consideration paid in the selected acquisitions by the comparable projected
operating results of the acquired companies. No company, business or transaction
compared in the comparable acquisition analysis, however, is identical to
Primary Network. Accordingly, the comparable acquisition analysis is not
entirely mathematical; rather, it involves complex considerations and judgments
concerning differences in financial and operating characteristics and other
factors that could affect the acquisition, public trading and other values of
the comparable companies.
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In sum, the comparable transaction analyses resulted in indications of
enterprise value for Primary Network which were materially lower than the ranges
indicated by the comparable company approach or the discounted cash flow
approach, and which were less than $100 million.
Consideration Received by Primary Network Shareholders. The enterprise
value indications for Primary Network were adjusted to reflect Primary Network's
debt obligations. The resulting equity value of Primary Network was compared to
the value of the consideration to be received by Primary Network's shareholders
in connection with the transaction. The value of such consideration was
determined, in part, by analyzing the public market price of Mpower's common
equity securities. Such comparison indicated that the value of the consideration
to be received by Primary Network's shareholders exceeded the value of Primary
Network's resulting equity as determined by the three aforementioned approaches.
Miscellaneous. In arriving at its fairness opinion, Houlihan Lokey
reviewed key economic and market indicators, including growth in gross domestic
product, inflation rates, interest rates, consumer spending levels,
manufacturing productivity levels, unemployment rates and general stock market
performance. Houlihan Lokey's opinion is based on the business, economic, market
and other conditions as they existed as of April 19, 2000 and on the projected
financial information provided to Houlihan Lokey as of such date. In rendering
its opinion, Houlihan Lokey has relied upon and assumed, without independent
verification, that the historical and projected financial information provided
to Houlihan Lokey by Primary Network has been reasonably and accurately prepared
based upon the best current available estimates of the financial results and
condition of Primary Network. Houlihan Lokey did not independently verify the
accuracy or completeness of the information supplied to it by Primary Network
and does not assume responsibility for it. Except as set forth above, Houlihan
Lokey did not make any independent appraisal of the specific properties or
assets of Primary Network.
The summary set forth above describes the material points of more
detailed analyses performed by Houlihan Lokey in arriving at its fairness
opinion. The preparation of a fairness opinion is a complex analytical process
involving various determinations as to the most appropriate and relevant methods
of financial analysis and application of those methods to the particular
circumstances and is therefore not readily susceptible to summary description.
In arriving at its opinion, Houlihan Lokey made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Houlihan
Lokey believes that its analyses and summary set forth herein must be considered
as a whole. In its analysis, Houlihan Lokey made numerous assumptions with
respect to Primary Network, industry performance, general business, economic,
market and financial conditions and office matters, many of which are beyond the
control of Primary Network. The estimates contained in such analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be more or less favorable than suggested by such analyses.
However, there were no specific factors reviewed by Houlihan Lokey that did not
support its opinion. Additionally, analyses relating to the value of businesses
or securities are not appraisals.
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Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty.
Interests of Certain Persons in the Merger
Certain of Primary Network's officers and directors have interests in
the merger in addition to those of the Primary Network stockholders generally.
Specifically, Alan Schrager has served as Chief Financial Officer and
director of Primary Network since November 1999 under the terms and conditions
of a Secondment Agreement by and between Primary Network and U.S. Bancorp Libra,
dated as of November 23, 1999. As partial compensation for his services as Chief
Financial Officer, Alan Schrager has received 680,000 shares of Series B
Preferred Stock of Primary Network and Warrants to purchase 520,000 shares of
Series B Preferred Stock. Under the terms of the Secondment Agreement, U.S.
Bancorp Libra will receive from Primary Network a fee equal to 0.5% of the total
enterprise value of Primary Network after the consummation of the merger.
The following officers and directors of Primary Network have been
granted stock options that vest upon a change in control of the ownership of
Primary Network:
Blake Ashby 300,000 stock options
Mike Torrence 100,000 stock options
Tony Hartke 50,576 stock options
Further, Primary Network officers and directors hold options to
purchase Primary Network common and preferred stock. Excluding the warrants
issued to Alan Schrager at the time of the merger, the officers' and directors'
total number of options that are exercisable will be 818,647. The directors'
options under the Primary Network stock option plan will be converted into
options to acquire Mpower common stock, with the number of shares and exercise
price adjusted to reflect the common stock exchange ratio.
Additionally, Mpower has agreed for a period of six years after the
effective time of the merger to:
o maintain in effect the indemnification provisions in Primary
Network's existing amended and restated articles of incorporation
and by-laws; and
o maintain insurance for Primary Network's directors and officers,
including former directors and officers.
Certain directors of Primary Network were parties to employment
agreements that provided for cash payments upon the occurrence of a change of
control of Primary Network. The aggregate cash payments owed to these directors
upon a change of control was approximately $545,000. Mpower has agreed to enter
into new employment agreements with these directors that supercede the previous
employment agreements with Primary Network and provide for different
compensation provisions. As of the effective
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date, Rich Phillips and Tom Hesterman will have entered into new employment
agreements with Mpower.
As of the record date, directors and executive officers of Primary
Network beneficially owned approximately 64% of the outstanding shares of
Primary Network common stock entitled to vote at the special meeting.
Accounting Treatment
The merger is expected to be accounted for using the purchase method of
accounting. Under the purchase method of accounting, the purchase price in the
merger is allocated among the Primary Network assets acquired and the Primary
Network liabilities assumed to the extent of their fair market value, with any
excess purchase price being allocated to goodwill. The assets and liabilities
and results of operations of Primary Network will be consolidated into the
assets and liabilities and results of operations of Mpower subsequent to the
Effective Time.
Certain U.S. Federal Income Tax Consequences
The following general discussion is a summary of the anticipated
material U.S. federal income tax consequences of the merger to a stockholder of
Primary Network stock that is a U.S. holder and that holds shares of Primary
Network stock (and that will hold shares of Mpower common stock) as capital
assets (generally, property held for investment). For purposes hereof, a U.S.
holder is a beneficial owner of Primary Network stock that is (i) a U.S. citizen
or resident alien individual, (ii) a corporation created or organized in or
under the laws of the United States or any state, (iii) an estate the income of
which is subject to U.S. federal income tax without regard to the source and
(iv) a trust if a court within the United States is able to exercise primary
supervision over its administration and one or more U.S. persons have authority
to control all substantial decisions relating to the trust.
This summary is intended only as general information and, thus, does
not address all of the U.S. federal income tax consequences of the merger that
may be relevant to beneficial owners of Primary Network stock based upon their
particular circumstances. Moreover, this summary does not apply to beneficial
owners of Primary Network stock that may be subject to special tax rules
(including, without limitation, non-U.S. persons, financial institutions,
tax-exempt organizations, insurance companies, dealers in securities, persons
who hold shares of Primary Network stock as a hedge, or as part of a
constructive sale or conversion transaction and persons who acquired their
shares of Primary Network stock pursuant to the exercise of employee stock
options or otherwise as compensation). This summary also does not cover any
aspect of U.S. federal tax law other than income taxation, and does not discuss
the tax consequences of the merger under the laws of any state, locality or
non-U.S. jurisdiction.
Beneficial owners of Primary Network stock are strongly urged to
consult their own tax advisors as to the specific tax consequences of the merger
to them under U.S. federal, as well as under applicable state, local and
non-U.S., tax law.
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Tax Opinions. Shearman & Sterling, counsel to Mpower, and Milbank,
Tweed, Hadley & McCloy LLP, counsel to Primary Network, have rendered opinions
to the effect that, under current U.S. federal income tax law, (A) the merger
will qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended, which is referred to as the Code, and
(B) each of Primary Network, Mpower and Mpower Merger Sub will be a party to
such reorganization within the meaning of Section 368(b) of the Code. Neither
Mpower nor Primary Network will request a ruling from the Internal Revenue
Service, which is referred to as the IRS, with regard to any of the U.S. federal
income tax consequences of the merger. The tax opinions are based on and subject
to certain assumptions and limitations as well as factual representations
received from Mpower, Mpower Merger Sub and Primary Network, as discussed below.
Opinions of counsels represent such counsels' best legal judgment and have no
binding effect or official status of any kind. No assurances can be given that
contrary positions may not be taken by the IRS or a court considering the
issues.
Tax Consequences of the Reorganization and the Merger. Subject to the
limitations and qualifications set forth herein, the material U.S. federal
income tax consequences of the merger, as a reorganization, to a U.S. holder of
Primary Network stock can be summarized as follows:
o No gain or loss will be recognized by a U.S. holder solely as a
result of the exchange of Primary Network stock for Mpower common
stock in the merger, except to the extent of cash received in lieu
of fractional shares.
o A U.S. holder that receives cash in lieu of a fractional share of
Mpower common stock generally will recognize capital gain or loss
measured by the difference between the amount of cash received and
the part of such U.S. holder's tax basis that is apportioned to
the fractional share of Mpower common stock (as described below).
If, however, the receipt of such cash has the effect of a
distribution of a dividend with respect to the U.S. holder, all or
some part of the cash payment may be treated as ordinary dividend
income.
o A U.S. holder's aggregate tax basis in Mpower common stock
received in the merger will be same as the aggregate tax basis of
Primary Network stock surrendered in exchange therefor (reduced by
any amount of tax basis allocable to a fractional share interest
in Mpower common stock for which cash is received).
o A U.S. holder's holding period for the Mpower common stock
received in the merger (including fractional shares redeemed for
cash) will include the holding period of the Primary Network stock
surrendered in exchange therefor.
Limitations on Opinion and Discussion. As noted earlier, the tax
opinions are subject to certain assumptions relating to, among other things, the
truth and accuracy of certain representations made by Mpower, Mpower Sub and
Primary Network, and the
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consummation of the merger in accordance with the terms of the merger agreement
and the applicable state law. Furthermore, the tax opinions will not bind the
IRS and, therefore, the IRS is not precluded from asserting a contrary position.
The tax opinions and this discussion are based on currently existing provisions
of the Code, existing and proposed Treasury regulations, and current
administrative rulings and court decisions. There can be no assurance that
future legislative, judicial, or administrative changes or interpretations will
not adversely affect the accuracy of the tax opinions or of the statements and
conclusions set forth herein. Any such changes or interpretations could be
applied retroactively and could affect the tax consequences of the merger.
Regulatory Approvals
The merger is subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, which is referred to as the HSR
Act or HSR, which prevents certain transactions from being completed until
required information and materials are furnished to the Antitrust Division of
the Department of Justice and the Federal Trade Commission and certain waiting
periods end or expire. Mpower and Primary Network filed the required information
and material with the Department of Justice and the Federal Trade Commission on
May 5, 2000, and will request early termination of the applicable waiting
period. Unless the waiting period is terminated, we expect the waiting period to
expire on June 4, 2000.
The Antitrust Division of the Department of Justice or the Federal
Trade Commission may challenge the merger on antitrust grounds after expiration
or termination of the waiting period. Accordingly, at any time before or after
the completion of the merger, either the Antitrust Division of the Department of
Justice or the Federal Trade Commission could take action under the antitrust
laws as it deems necessary or desirable in the public interest, or certain other
persons could take action under the antitrust laws, including seeking to enjoin
the merger. Additionally, at any time before or after the completion of the
merger, notwithstanding that the applicable waiting period ended, any state
could take action under the antitrust laws as it deems necessary or desirable in
the public interest. There can be no assurance that a challenge to the merger
will not be made or that, if a challenge is made, we will prevail.
The merger is also subject to certain telecommunications related
approvals. Mpower anticipates filing the necessary application with the FCC to
transfer control of Primary Network's authorization to provide international
long distance service by May 16, 2000. Mpower also anticipates filing any
required applications for consent with state commissions by May 12, 2000. Prior
consent of the FCC and of certain state commissions is necessary to consummate
the merger. In addition, post-merger letter notifications to certain state
commissions will also be required following completion of the merger. Mpower and
Primary Network anticipate that any regulatory approvals will be obtained in the
normal course within approximately 60 to 90 days of filing the applications.
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Restrictions on Sales of Mpower Common Stock by Affiliates of Mpower and Primary
Network
The shares of Mpower common stock to be issued in connection with the
merger will be registered under the Securities Act of 1933, as amended, and will
be freely transferable under the Securities Act, except for shares of Mpower
common stock issued to any person who is deemed to be an "affiliate" of Primary
Network at the time of the Primary Network special meeting. Persons who may be
deemed to be affiliates include individuals or entities that control, are
controlled by, or are under the common control with Primary Network and may
include some of Primary Network's officers and directors, as well as Primary
Network's principal stockholders. Affiliates may not sell their shares of Mpower
common stock acquired in connection with the merger except pursuant to:
o an effective registration statement under the Securities Act
covering the resale of those shares;
o an exemption under paragraph (d) of Rule 145 under the Securities
Act; or
o any other applicable exemption under the Securities Act.
Mpower's registration statement on Form S-4, of which this Proxy
Statement/Prospectus forms a part, does not cover the resale of shares of Mpower
common stock to be received by affiliates of Primary Network in the merger.
Stock Exchange Quotation
It is a condition to the merger that the shares of Mpower common stock
to be issued in connection with the merger be authorized for listing on NASDAQ,
subject to official notice of issuance.
Appraisal Rights
Under the Delaware General Corporation Law, which is referred to as the
DGCL, a stockholder of a corporation who does not vote in favor of or consent in
writing to certain merger transactions and who demands appraisal of his shares
may, under varying circumstances, be entitled to appraisal rights pursuant to
which such shareholder may receive cash in the amount determined by a Delaware
court to be the fair value of his shares together with a fair rate of interest,
if any, instead of the consideration he would otherwise receive in the merger
transaction. The concept of "fair value" in payment for shares upon exercise of
appraisal rights, under the DGCL, must be determined exclusive of any element of
value arising from the accomplishment or expectation of the relevant
transaction.
Primary Network stockholders who oppose the merger will have the right
to dissent and demand appraisal of and to receive payment in cash of the fair
market value of their shares of Primary Network common stock as set forth in the
DGCL.
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A Primary Network stockholder is entitled to a judicial determination
of the fair value required to be paid in cash to such dissenting holders for
their shares of Primary Network common stock if such stockholder:
o holds shares of Primary Network common stock on the record date
for the special meeting;
o delivers to Primary Network prior to the special meeting a written
notice that such stockholder intends to demand the appraisal of
such stockholder's shares of Primary Network common stock;
o has neither voted in favor of nor consented to in writing the
merger;
o holds such shares of Primary Network common stock until the
effective date of the merger; and
o otherwise complies with the provisions of Section 262 of the DGCL.
Any such judicial determination of the fair value of the shares of
Primary Network common stock could be based upon factors other than, or in
addition to, the price per share of Primary Network common stock to be paid by
Mpower in the merger or the market value of the shares of Primary Network common
stock, including asset values and the investment value of the shares of Primary
Network common stock. The value so determined could be more or less than the
price per share paid to the holders of Primary Network common stock who do not
exercise their appraisal rights under the DGCL.
If any holder of shares of Primary Network common stock who demands
appraisal under Section 262 of the DGCL fails to perfect, or effectively
withdraws or loses his right to appraisal, as provided in the DGCL, the shares
of Primary Network common stock of such holder will be converted into shares of
Mpower common stock in accordance with the terms of the merger agreement. A
Primary Network stockholder may withdraw his demand for appraisal by delivery to
the Primary Network of a written withdrawal of his demand for appraisal and
acceptance of the merger. Failure to vote against the merger at the special
meeting does not constitute a waiver of a Primary Network stockholder's
appraisal rights under Section 262 of the DGCL.
In order for a Primary Network stockholder to avail himself of his
appraisal rights, he must deliver to Primary Network, before the vote on the
merger, a written demand for appraisal of his shares. A vote against the merger
by a stockholder of Primary Network does not constitute the necessary demand.
Within ten days of the consummation of the merger, the surviving corporation
will notify the dissenting shareholder that the merger has been consummated.
Within 120 days after the effective date of the merger, the dissenting
shareholder must file a petition in the Delaware Court of Chancery demanding a
determination of the value of the Primary Network stock held by him. The
dissenting shareholder is entitled to receive from the surviving corporation a
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statement setting forth the aggregate number of shares not voted in favor of the
merger and with respect to which demands for appraisal have been received and
the aggregate number of holders of such shares. After the filing of a petition
with the Court of Chancery, the Register in Chancery, if ordered by the Court,
will fix a time and date for the hearing of the petition. At the hearing, the
Court will determine which stockholders have appraisal rights and will appraise
the shares, together with a fair rate of interest, if
any, to be paid upon the amount determined to be the fair value. The Court will
order the payment of the fair value of the shares by the surviving corporation.
The foregoing discussion is not a complete statement of law pertaining
to appraisal rights under the DGCL and is qualified in its entirety by reference
to the full text of Section 262 of the DGCL attached to the Proxy
Statement/Prospectus at Annex E. FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION
262 OF THE DGCL FOR PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH
RIGHTS.
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THE EXCHANGE OFFER AND THE LETTER AGREEMENT
Pursuant to the terms of a letter agreement, dated April 17, 2000,
among EC Primary, L.L.C., Quantum Emerging Growth Partners C.V., Ravich
Revocable Trust of 1989, The Ravich Children Permanent Trust, U.S. Bancorp
Libra, TGV/Primary Investors LLC, who are collectively referred to as Primary
Holders, and Mpower, Mpower agreed that promptly following the consummation of
the merger, it will commence an offer to exchange its 13% Senior Notes due 2010
for any and all outstanding 12% Senior Subordinated Discount Notes due 2006 of
Primary Network. Concurrently with such exchange offer, Mpower will also solicit
consents from the holders of the 12% Senior Subordinated Discount Notes to
certain amendments to the purchase agreement pursuant to which the 12% Senior
Subordinated Discount Notes were issued. The proposed amendments will delete
substantially all of the restrictive covenants contained in the 12% Senior
Subordinated Discount Notes agreement and require the consent of a majority of
the outstanding principal amount of Discount Notes to become effective. The
acceptance of 12% Senior Subordinated Discount Notes tendered in the exchange
offer will be conditioned on the receipt of such consents and the holders
thereof agreeing to the restrictions on sale described below.
Pursuant to the Letter Agreement, the Primary Holders, who collectively
represent more than a majority of the outstanding principal amount of 12% Senior
Subordinated Discount Notes, agreed to tender their 12% Senior Subordinated
Discount Notes in the exchange offer and to consent to the proposed amendments
in the consent solicitation. Mpower also agreed that upon completion of the
exchange offer, Mpower would issue to the Primary Holders 50,000 shares of
common stock, pro rata.
The merger will trigger the change of control provisions of the 12%
Senior Subordinated Discount Notes. As a result, in the event that any 12%
Senior Subordinated Discount Notes remain outstanding after the consummation of
the exchange offer, the terms of the 12% Senior Subordinated Discount Notes
require Mpower to commence within 60 days of the consummation of the merger an
offer to repurchase all of the outstanding 12% Senior Subordinated Discount
Notes at a purchase price equal to 101% of the accreted value of the 12% Senior
Subordinated Discount Notes thereof, plus accrued and unpaid interest, if any,
as of and to the date of redemption.
Terms of the 13% Senior Notes and the Exchange Offer
The 13% Senior Notes to be issued in the exchange offer will be issued
under the indenture dated as of March 24, 2000 and will have the same terms, and
will be of the same class, as Mpower's currently outstanding Senior Notes which
were originally issued on March 24, 2000 under the indenture dated as of March
24, 2000.
For each $1,000 of accreted value of the 12% Senior Subordinated
Discount Notes as of the time that the 12% Senior Subordinated Discount Notes
are tendered for exchange, Mpower will deliver 13% Senior Notes having a fair
value of $1,000. However, the principal amount of such 13% Senior Notes will be
reduced by the amount of accrued interest on the 13% Senior Notes from March 24,
2000 through the time the
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13% Senior Notes are delivered. Fair value is defined as the average of the bids
to purchase $10 million of 13% Senior Notes to be obtained two business days
prior to the time that the 12% Senior Subordinated Discount Notes are tendered
for exchange by Mpower and the Primary Holders from two investment banking firms
to be agreed upon by Mpower and the Primary Holders if neither bid is more than
five percent higher than the other bid. If one bid is more than five percent
higher than the other bid, then Mpower and the Primary Holders shall obtain a
bid from another investment banking firm. If the bid obtained from the third
bank is equal to, or between, the bids obtained from the first two banks, then
the fair value of the 13% Senior Notes will be the amount bid by the third bank.
If the bid by the third bank is higher or lower than the bids from either of the
first two banks, then the fair value of the 13% Senior Notes will be the average
of the bid by the third bank and the bid by one of the first two banks that is
closer to the bid by the third bank.
The aggregate principal amount of 13% Senior Notes to be delivered to
each holder of 12% Senior Subordinated Discount Notes pursuant to the exchange
offer will be rounded to the nearest $1,000, with amounts of $499 being rounded
down and amounts of $500 being rounded up.
The 13% Senior Notes to be issued in the exchange offer and the shares
of Mpower's common stock to be issued to the Primary Holders will be registered
under the Securities Act pursuant to a registration statement on Form S-4.
Restrictions on Sale
Each holder of 12% Senior Subordinated Discount Notes receiving 13%
Senior Notes in the exchange offer will agree that, during the six-month period
following the issuance of the 13% Senior Notes pursuant to the exchange offer,
it will not directly or indirectly (1) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, lend, or otherwise
transfer or dispose of any 13% Senior Notes or any securities convertible into
or exercisable or exchangeable for 13% Senior Notes or (2) enter into any swap
or other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of any 13% Senior Notes or otherwise
establish or maintain a "put equivalent position" (within the meaning of Rule
16a-1(h)) under the Exchange Act, whether any such transaction described in
clause (1) or (2) above is to be settled by delivery of 13% Senior Notes or such
other securities, in cash or otherwise; provided, however, such 12% Senior
Subordinated Discount Note holders may offer, sell or contract to sell the 13%
Senior Notes at the par value of the 13% Senior Notes plus accrued interest or a
higher amount or may be released from its obligations described in this
paragraph with the prior written consent of Bear Stearns & Co, Inc.
A copy of the letter agreement is attached as Annex D to this Proxy
Statement/Prospectus and is incorporated by reference into this Proxy
Statement/Prospectus.
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THE MERGER AGREEMENT
The merger agreement contemplates the merger of Primary Network with
Mpower Merger Sub, with Primary Network continuing as the surviving corporation
after the merger. This section of the Proxy Statement/Prospectus describes
certain material provisions of the merger agreement. Because the description of
the merger agreement contained in this Proxy Statement/Prospectus is a summary,
it does not contain all the information that may be important to you. You should
carefully read the entire copy of the merger agreement attached as Annex I to
this Proxy Statement/Prospectus before you decide how to vote. The merger
agreement attached at Annex A to this Proxy Statement/Prospectus qualifies the
description of the merger agreement contained in this document in its entirety
and is incorporated by reference into this Proxy Statement/Prospectus.
Completion of the Merger
Closing
Unless the parties agree otherwise, the closing of the merger will take
place as promptly as practicable and not later than the third business day after
the date on which all closing conditions have been satisfied or waived, or any
other time as agreed to in writing by Mpower, Mpower Merger Sub and Primary
Network.
Effective Time
The merger will be effective upon the filing of a certificate of merger
with the Secretary of State of the State of Delaware, or any later time as
agreed to by Mpower, Mpower Merger Sub and Primary Network. The filing of the
certificate of merger shall be made as soon as practicable after all closing
conditions have been satisfied or waived.
Conversion of Shares
Each Primary Network stockholder will receive in the merger 0.02022 of
a share of Mpower common stock for each share of Primary Network common stock
owned by such stockholder. For any resulting fractional shares, a Primary
Network stockholder will receive cash in an amount equal to the market value of
the fractional shares of Mpower common stock received.
Certain Representations and Warranties
Representations and Warranties of Both Companies
The merger agreement contains various customary representations and
warranties of Mpower, Mpower Merger Sub and Primary Network relating to, among
other things:
o proper organization and good standing of Mpower, Mpower Merger Sub
and Primary Network;
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o the corporate authorization and enforceability of the merger
agreement;
o the capitalization of Mpower, Mpower Merger Sub and Primary
Network;
o the preparation of financial statements;
o the absence of any undisclosed liabilities;
o governmental approvals;
o no conflict with articles of incorporation, by-laws, debt
instruments or laws;
o the compliance with laws by Mpower, Mpower Merger Sub and Primary
Network;
o the absence of litigation;
o brokers; and
o permits.
Additional Representations and Warranties of Mpower and Mpower Merger
Sub
The merger agreement contains additional representations and warranties
of Mpower and Mpower Merger Sub relating to, among other things:
o the absence of certain material adverse changes or events;
o the due authorization and valid issuance of Mpower stock to be
issued in connection with the merger;
o the ownership of Mpower Merger Sub;
o no subsidiaries of Mpower other than Mpower Merger Sub;
o the articles of incorporation and by-laws of Mpower and Mpower
Merger Sub;
o the absence of liabilities incurred by Mpower Merger Sub;
o the classification of the merger as a reorganization within the
meaning of Section 368(a) of the Code; and
o the registration statement to be prepared by Mpower and the
information to be supplied by Mpower for inclusion in the proxy
statement to Primary Network's stockholders.
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Additional Representations and Warranties of Primary Network Holdings,
Inc.
The merger agreement contains additional representations and warranties
of Primary Network relating to, among other things:
o subsidiaries;
o the valid issuance of all outstanding Primary Network common
stock;
o the absence of certain changes;
o intellectual property;
o material contracts;
o employee benefit plans and labor matters;
o tax;
o year 2000 compliance;
o interests of Primary Network stockholders, officers and directors;
o insurance;
o the information to be included in the proxy and registration
statements;
o customers;
o sales personnel; and
o the condition of the assets.
Certain Covenants
The merger agreement contains certain covenants relating to:
o filing of the registration statement on Form S-4;
o obligations of Mpower with respect to Primary Network employees
after the merger;
o access to books, records and other information;
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o obligation to inform the other party of any events or
circumstances which could result in a breach of any of the
representations and warranties and of any material developments
affecting either party;
o qualification as a reorganization within the meaning of Section
368(a) of the Code;
o delivery of opinion letters from attorneys;
o Primary Network's obligation to call a stockholders' meeting of
Primary Network to vote on the approval and adoption of the merger
agreement and the merger;
o the obligation of each party to make promptly its filings under
the HSR Act and use its reasonable efforts to take any proper and
advisable action to consummate the merger;
o quotation of Mpower shares issued in the merger on NASDAQ; and
o the provision of up to $15,000,000 in funding to Primary Network
by Mpower pending the effective time of the merger.
No Solicitation of Transactions
The merger agreement provides that Primary Network shall not, and shall
not instruct its affiliates, officers, directors, representatives or agents to,
solicit, initiate, consider, encourage, or accept any other proposals or offers:
o relating to any acquisition or purchase of all or any portion of
the capital stock or a material portion of the assets of Primary
Network or any of its subsidiaries;
o to enter into any business combination with Primary Network or any
of its subsidiaries; or
o to enter into any other extraordinary business transaction
involving or otherwise relating to Primary Network or any of its
subsidiaries.
The merger agreement also provides that Primary Network shall not, and
shall not instruct its affiliates, officers, directors, representatives or
agents to, participate in any discussions, conversations, negotiations or other
communications regarding, or furnish to any other person any information with
respect to, or otherwise cooperate in any way, assist or participate in,
facilitate or encourage any effort by any other person to seek to do any of the
foregoing.
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Conduct of the Business of Primary Network Prior to the Merger
Pursuant to the merger agreement, Primary Network has agreed that,
prior to the merger or earlier termination of the merger agreement, unless
Mpower shall otherwise consent in writing, it shall not, and where applicable
shall cause each of its subsidiaries not to:
o amend its certificate of incorporation or by-laws;
o amend, terminate or cancel any material claim, or waive any other
material right of Primary Network or its subsidiaries, or waive
any material debt owed to it;
o issue or authorize the issuance of any shares of capital stock or
any options, warrants, convertible securities or other rights
relating to the capital stock or redeem any of the capital stock,
other than issuance of Primary Network common stock pursuant to
preferred stock or Primary Network stock options, or declare or
pay any dividend or distribute any of the assets of Primary
Network or its subsidiaries, or redeem, purchase or acquire any of
the securities of Primary Network or its subsidiaries;
o fail to pay any creditor any material amount owed to such creditor
when due, other than trade payables incurred in the ordinary
course of business consistent with past practice;
o sell, exchange or otherwise dispose of any of Primary Network's or
its subsidiaries' material assets other than in the ordinary
course of business consistent with past practice, and other than
sales of assets in connection with the funding to be provided by
Mpower;
o enter into any transactions whereby Primary Network or any of its
subsidiaries would merge with, enter into a consolidation with or
acquire any interest in a person or entity or acquire a
substantial portion of the assets or business of a person or any
entity, or any division or line of business of any person or
entity, or otherwise acquire any material assets other than in the
ordinary course of business consistent with past practice;
o enter into any agreement, arrangement or transaction with any of
its directors, officers, employees or stockholders (or with any
relative, beneficiary, spouse or affiliate of such person or
entity) except for payments of salary or benefits in the ordinary
course of business consistent with past practice;
o change any method of accounting or accounting practice or policy
other than changes required by United States generally accepted
accounting principles;
o make any expressed or deemed election or settle or compromise with
respect to taxes of Primary Network or any of its subsidiaries;
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o hire or otherwise employ any person whose annual cash compensation
would exceed $100,000;
o cause any lien to be imposed on any assets or properties of
Primary Network or any of its subsidiaries except any lien
securing indebtedness incurred in connection with the funding to
be provided by Mpower; and
o incur any indebtedness, except in connection with the funding to
be provided by Mpower.
Stock Options and Employee Benefits
Effective as of the completion of the merger, all outstanding Primary
Network stock options will remain outstanding and all of Primary Network's
obligations with respect to each outstanding option will be assumed by Mpower.
The Primary Network stock options will continue to have and be subject to the
same terms and conditions as set forth in the Primary Network Holdings, Inc.
Stock Option Plan. Each Primary Network stock option will be exercisable for a
number of shares of Mpower common stock equal to the number of shares of Primary
Network common stock covered by such Primary Network stock option multiplied by
the merger exchange ratio. The Mpower common stock subject to Primary Network
stock options will be covered by an effective registration statement on Form S-8
as soon as practicable after the completion of the merger.
Indemnification and Insurance
The merger agreement provides that following the merger, Mpower,
Primary Network (before the completion of the merger) and the stockholders of
Primary Network which have entered into the shareholders agreement with Mpower
described in the section entitled "Shareholders Agreement" on page 86 will
indemnify each other against any losses arising out of its breach of any
representation, warranty, covenant or agreement contained in the merger
agreement.
The merger agreement provides that following the merger, the by-laws of
the surviving corporation will contain provisions no less favorable than those
currently in place in the Primary Network by-laws with regard to
indemnification. The surviving corporation will maintain for a period of six
years the current policies of directors' and officers' liabilities insurance
maintained by Primary Network, or policies of at least the same coverage
containing terms and conditions which are not less favorable.
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Conditions to the Merger
Conditions to Each Party's Obligations to Complete the Merger
The respective obligations of Mpower, Mpower Merger Sub and Primary
Network to effect the merger are subject to the fulfillment of the following
conditions, unless waived by the parties:
o HSR Act; Other Approvals and Consents. The waiting period
applicable to consummation of the merger under the HSR Act shall
have expired or been terminated. All other applicable approvals
and authorizations of governmental and regulatory authorities
shall have been obtained.
o No Proceeding. No order of any court or administrative agency
shall be in effect, and no governmental suit, action or
governmental proceeding shall be pending against any of the
parties that would make the merger illegal or otherwise would
prohibit the consummation of the merger.
o NASDAQ Listing. The shares of Mpower common stock to be issued in
the merger shall have been approved for listing on NASDAQ.
Additional Conditions to the Obligations of Mpower
The obligations of Mpower and Mpower Merger Sub to effect the merger is
further subject to the fulfillment of the following additional conditions,
unless waived by Mpower:
o Performance of Covenants; Representations and Warranties. Primary
Network and the stockholders who have entered into the
shareholders agreement with Mpower described in the section
entitled "Shareholders Agreement" on page 86 shall have performed
or complied in all material respects with all of their agreements
and covenants in the merger agreement and the shareholders
agreement, respectively. All the representations and warranties of
Primary Network and the stockholders who have entered into the
shareholders agreement with Mpower described on page 86,
respectively, shall have been true and correct when made and shall
be true and correct in all material respects at the time of the
consummation of the merger as if made at and as of such time, and
Mpower shall have received a certificate of a principal executive
officer of Primary Network to that effect.
o Tax Opinion. Mpower shall have received the opinion of Shearman &
Sterling, counsel to Mpower, that the merger will constitute a
reorganization within the meaning of Section 368(a) of the
Internal Revenue Code and Mpower, Merger Sub and Primary Network
will each be a party to the reorganization within the meaning of
Section 368(b) of the Internal Revenue Code (see "--Material
Federal Income Tax Consequences").
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o Opinion of Counsel to Primary Network. Mpower shall have received
an opinion from Milbank, Tweed, Hadley & McCloy LLP, counsel to
Primary Network.
o No Material Adverse Effect. No event or occurrence shall have
occurred that is, or would be reasonably likely to be, materially
adverse to the business, operations, financial condition, results
of operations or prospects of the business of Primary Network or
would be reasonably likely to materially adversely affect the
ability of Mpower or the surviving corporation to operate or
conduct the business of Primary Network in the manner in which it
is currently operated or would constitute a breach of any
representation or warranty made by Primary Network in the merger
agreement.
o Certificate of Merger. Primary Network shall have executed and
delivered to Mpower the certificate of merger to be filed with the
Secretary of State of the State of Delaware in connection with the
merger.
o FIRPTA. Primary Network shall have certified to Mpower that
Primary Network is not, and has not been for the relevant period
specified in Section 897 of the Internal Revenue Code, a United
States real property holding corporation within the meaning of
Section 897 of the Internal Revenue Code.
Additional Conditions to the Obligations of Primary Network
The obligation of Primary Network to effect the merger is further
subject to the fulfillment of the following additional conditions, unless waived
by Primary Network.
o Performance of Covenants; Representations and Warranties. Mpower
and Mpower Merger Sub shall have performed or complied in all
material respects with all of their agreements and covenants in
the merger agreement and all the representations and warranties
made by Mpower and Mpower Merger Sub in the merger agreement shall
have been true and correct when made and shall be true and correct
in all material respects on an at the time of the consummation of
the merger as if made at and as of such time, and Primary Network
shall have received a certificate of a principal executive officer
of Mpower and Mpower Merger Sub to that effect.
o Tax Opinion. Primary Network shall have received the opinion of
Milbank, Tweed, Hadley & McCloy LLP, counsel to Primary Network,
that the merger will constitute a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code and Mpower,
Merger Sub and Primary Network will each be a party to the
reorganization within the meaning of Section 368(b) of the
Internal Revenue Code (see "--Material Federal Income Tax
Consequences").
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o Opinion of Counsel to Mpower and Mpower Merger Sub. Primary
Network shall have received an opinion from Lionel, Sawyer &
Collins, counsel to Mpower, and Shearman & Sterling, counsel to
Mpower Merger Sub.
o No Material Adverse Effect. No event or occurrence shall have
occurred that is, or is reasonably likely to be, materially
adverse to the business, operations, financial condition, results
of operations or prospects of the business of Mpower or would
constitute a breach of any representation or warranty made by
Mpower or Mpower Merger Sub in the merger agreement.
o Certificate of Merger. Mpower and Mpower Merger Sub shall have
executed and delivered to Primary Network the certificate of
merger to be filed with the Secretary of State of the State of
Delaware in connection with the merger.
o Registration Statement. The registration statement of Form S-4
filed by Mpower shall have become effective, and no stop order
suspending such effectiveness shall have been issued and remain in
effect, and no proceeding for that purpose shall have been
instituted by the SEC.
Termination of the Merger Agreement
The merger agreement may be terminated at any time prior to the merger:
o by the mutual consent of Mpower and Primary Network;
o by either Mpower or Primary Network if;
o the merger is not completed by the termination date, which is
October 31, 2000, so long as the delay or default was not on the
part of the terminating party; or
o the merger is restricted, prohibited or prevented by a final
nonappealable court or governmental order;
o by Mpower, upon any material breach of any representation,
warranty, covenant or material obligation on the part of Primary
Network or any of the stockholders who have entered into the
shareholders agreement with Mpower described in the section
entitled "Shareholders Agreement" on page 86 contained in the
merger agreement or the shareholders agreement, respectively,
which has not been cured within ten days of notice by Mpower; or
o by Primary Network, upon any material breach of any
representation, warranty, covenant or material obligation on the
part of Mpower or Mpower Merger Sub contained in the merger which
has not been cured within ten days of notice by Primary Network.
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Expenses and Termination Fees
Expenses. The merger agreement provides that all costs and expenses
incurred in connection with the merger agreement and the transactions
contemplated in the merger agreement shall be paid by the party incurring these
expenses.
No Termination Fee. The merger agreement provides that no termination
fee will be payable upon termination by either party; provided, however, that
nothing in the merger agreement shall relieve any party from liability for
breach of its representations, warranties, covenants or agreements contained in
the merger agreement.
Amendment
The merger agreement may not be amended except by an instrument in
writing executed by Mpower, Mpower Merger Sub and Primary Network.
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THE SHAREHOLDERS AGREEMENT
On April 17, 2000, simultaneously with entering into the merger
agreement, Mpower, Mpower Merger Sub, Primary Network and certain stockholders
of Primary Network, including Brian Matthews, Carol Matthews, Thomas Hesterman,
Welton Brison, Charles Wiegert, Richard Phillips, John Alden, EC Primary LLC,
Quantum Emerging Growth Partners C.V. and TGV Partners, who are collectively
referred to as the principal stockholders, entered into an agreement whereby the
principal stockholders agreed to vote at any meeting of the stockholders of
Primary Network in favor of the approval of the merger, the merger agreement and
the transactions contemplated in the merger agreement and against any other
proposal for any recapitalization, merger or other transaction requiring a vote
of the stockholders of Primary Network.
The principal stockholders agreed that if they fail to comply with
their voting requirements in these matters, Mpower shall be irrevocably
appointed to vote their shares in Primary Network at any stockholders meeting of
Primary Network held to vote on these matters.
As of April 17, 2000, the principal stockholders beneficially owned
approximately 46,522,153 shares of Primary Network common stock, which
constitutes 73.1% of the votes represented by the Primary Network common stock
outstanding as of this date.
Under the stockholders agreement, the principal shareholders agreed,
among other things:
o not to sell their shares of Primary Network common stock between
April 17, 2000 and the effective time of the merger;
o not to solicit, initiate, consider, encourage or accept any other
proposals or offers relating to any acquisition or purchase of all
or any portion of the capital stock or a material portion of the
assets of Primary Network or any of its subsidiaries, or to enter
into any business combination with Primary Network or any of its
subsidiaries, or to enter into any other extraordinary business
transaction involving or otherwise relating to Primary Network or
any of its subsidiaries; and not to participate in any
discussions, conversations, negotiations or other communications
regarding, or furnish to any other person any information with
respect to, or otherwise cooperate in any way with, assist or
participate in, facilitate or encourage any effort by any other
person to seek to do any of the actions described above;
o not to knowingly take any action intended or reasonably likely to
prevent or impede the merger from qualifying as a tax-free
reorganization;
o to ensure the delivery of opinions of counsel acting on behalf of
Primary Network under the merger agreement;
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o to maintain the confidentiality of all confidential or proprietary
information with respect to Mpower;
o to notify Mpower promptly of all events, circumstances, facts and
occurrences occurring after April 17, 2000 which would result in
any breach of a representation or warranty or covenant of the
Principal Shareholders in the shareholders agreement or which
could have the effect of making any representation or warranty of
the Principal Shareholders in the shareholders agreement untrue or
incorrect in any material respect and to notify Mpower of all
other material developments affecting Primary Network's assets,
liabilities, business and operations; and
o to agree to their indemnification obligations under the merger
agreement.
Brian Matthews, Carol Matthews, Charles Weigert and Welton Brison
further agreed that they shall not engage directly or indirectly in any business
anywhere in the world that markets, distributes, sells or supplies services of
the kind marketed, distributed, sold or supplied by Primary Network as of the
consummation of the merger or, directly or indirectly, own an interest in or
otherwise be connected with a business that competes with Primary Network, or
call upon, solicit, advise or otherwise do, or attempt to do, business with any
person or entity whom Primary Network or any of its subsidiaries had any
dealings with prior to the consummation of the merger, or take away or interfere
or attempt to interfere with any custom, trade, business or patronage of Primary
Network or any of its subsidiaries. Brian Matthews, Carol Matthews, Charles
Weigert and Welton Brison also agreed not to employ or engage as a consultant,
or directly or indirectly solicit the employment of, any director, officer or
employee of Primary Network or its subsidiaries (except for Michael Torrence or
anyone who leaves the employ of Primary Network or its subsidiaries without any
inducement) or induce or attempt to induce any of them to leave the employ of
Primary Network or its subsidiaries. However, Brian Matthews, Carol Matthews,
Charles Weigert and Welton Brison may engage in any business that owns,
operates, develops or is otherwise involved in the sale or supply of fantasy
sports games, learning tools or newspaper publications through web-based,
web-enabled data base or other systems, e-commerce, system integration, web
hosting or related consulting services or sporting teams, sporting arenas or
sporting events promotions.
A copy of the shareholders agreement is attached as Annex C to this
Proxy Statement/Prospectus and is incorporated by reference into this Proxy
Statement/Prospectus.
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DESCRIPTION OF MPOWER CAPITAL STOCK
General
The following description is a summary of the material terms of
Mpower's capital stock. It is not a complete description of all of the terms of
Mpower's capital stock. You should read this description of Mpower's capital
stock as well as the Nevada Revised Statutes, which are referred to as the NRS,
Mpower's articles of incorporation, including the certificates of designation of
preferred stock, and Mpower's by-laws. A copy of Mpower's articles of
incorporation has been filed as an exhibit to Mpower's registration statement on
Form S-4, registration number 333-33837, filed with the SEC on August 18, 1997,
which is incorporated by reference into this proxy statement/prospectus. A copy
of Mpower's by-laws has been filed as an exhibit to the Mpower's registration
statement on Form S-1, registration statement number 333-49085, filed with the
SEC on April 1, 1998, which is incorporated by reference into this Proxy
Statement/Prospectus.
Mpower's authorized capital stock consists of 60,000,000 shares of
common stock, $.001 par value per share, and 50,000,000 shares of preferred
stock, $.001 par value per share. Of the 50,000,000 shares of authorized
preferred stock, Mpower has designated 5,278,000 shares of Series B convertible
preferred stock, 1,250,000 shares of Series C convertible preferred stock and
4,140,000 shares of Series D convertible preferred stock with the voting,
dividend, liquidation and conversion rights described below. As of April 30,
2000, 35,514,985 shares of common stock, 1,250,000 shares of Series C
convertible preferred stock and 4,140,000 shares of Series D convertible
preferred stock were outstanding and 5,345,678 shares of common stock were
subject to outstanding options and warrants. On March 27, 2000, 5,277,779 shares
of Series B convertible preferred stock, issued in May 1999, were converted into
5,277,779 shares of Mpower common stock. As of the date of this Proxy
Statement/Prospectus, there are no shares of Series B convertible preferred
stock outstanding.
If Mpower issues preferred stock in the future, the preferred stock
will have the rights, terms and preferences specified by Mpower's board of
directors in a certificate filed with the Secretary of State of Nevada. The
issuance of preferred stock by the board of directors in the future could
adversely affect the rights of holders of Mpower's then outstanding classes of
capital stock with preferences over the common stock with respect to dividends
and liquidations and/or a class of capital stock with voting rights equal to or
greater than those of the common stock. Mpower has no present plan to issue any
additional series of preferred stock.
Common Stock
The holders of Mpower common stock are entitled to receive ratably,
from funds legally available for the payment thereof, dividends when and as
declared by resolution of Mpower's board of directors, subject to preferential
dividend rights granted to holders of Mpower's preferred stock. In the event of
liquidation, each share of Mpower common stock is entitled to share pro rata in
any distribution of Mpower's assets after payment or providing for the payment
of liabilities and the liquidation preferences of Mpower's
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preferred stock. Each holder of Mpower common stock is entitled to one vote for
each share of common stock held of record on the applicable record date on all
matters submitted to a vote of stockholders.
Holders of Mpower common stock have no cumulative voting rights or
preemptive rights to purchase or subscribe for any stock or other securities,
and there are no conversion rights or redemption rights or sinking fund
provisions with respect to Mpower common stock. The outstanding shares of Mpower
common stock and the shares of Mpower common stock to be issued pursuant to the
merger will be duly authorized, validly issued, fully paid and nonassessable.
Series B Convertible Preferred Stock
The Series B convertible preferred stock, none of which is outstanding
as of the date of this Proxy Statement/Prospectus, has the rights and
preferences described in the following paragraphs:
On any matter submitted to Mpower's stockholders, holders of shares of
Series B convertible preferred stock will be treated as if they hold the number
of shares of common stock into which their shares of Series B convertible
preferred stock could be converted and will be allowed to vote those shares
along with the holders of Mpower common stock. In addition, the holders of
shares of Series B convertible preferred stock will have the right to approve
any action to;
o increase or decrease the total number of authorized shares of, or
issue preferred stock ranking equal or senior to, the Series B
convertible preferred stock;
o dispose of assets in excess of a fixed dollar amount, merge or
consolidate or sell Mpower;
o liquidate Mpower;
o alter the terms of the Series B convertible preferred stock in a
manner adverse to the holders of the Series B convertible
preferred stock;
o pay dividends on Mpower common stock or other securities junior to
the Series B convertible preferred stock other than dividends
payable in Mpower common stock;
o enter into transactions with Mpower's affiliates other than
transactions covered by specified exceptions;
o make acquisitions in excess of a fixed dollar amount;
o incur additional debt in excess of fixed amounts;
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o make material changes to Mpower's business plan;
o hire a chief executive officer;
o organize subsidiaries or enter into joint ventures unless
specified conditions are met; and
o issue additional Mpower common stock that would result in an
increase in the number of shares of Mpower common stock into which
Series B convertible preferred stock may be converted.
If Mpower were to take one of these restricted actions without the
approval of the holders of Series B convertible preferred stock, the holders of
Series B convertible preferred stock may have the right to require it to seek a
sale of Mpower. To avoid having to sell Mpower if one of the restricted actions
described above is not approved by the holders of Series B convertible preferred
stock, Mpower has the right to redeem the Series B convertible preferred stock
at predetermined prices. If Mpower elects not to redeem the Series B convertible
preferred stock and the required sale of Mpower is not effected within six
months, then the holders of the Series B convertible preferred stock, along with
the holders of the Series C convertible preferred stock, if they then have
similar rights, would be entitled to elect a majority of Mpower's board of
directors.
The approval rights described above terminate if fewer than 1,759,260
shares of Series B convertible preferred stock are outstanding and the shares of
Series B convertible preferred stock outstanding constitute less than 5% of the
outstanding common stock assuming conversion of all outstanding shares of Series
B convertible preferred stock.
The holders of the Series B convertible preferred stock have the right
to representation on Mpower's board of directors as discussed below under
"--Series B and C Preferred Stock Board Representation."
Upon Mpower's liquidation, the holders of the Series B convertible
preferred stock are entitled to receive their liquidation amount on a pro rata
basis with the holders of any series of preferred stock which ranks equally with
the Series B convertible preferred stock and before any amounts may be paid to
holders of Mpower common stock or any other junior securities. The liquidation
amount will be the greater of (a) $9.00 per share or (b) the amount the holders
of Series B convertible preferred stock would have received if the Series B
convertible preferred stock had been converted into Mpower common stock. The
holders of the Series B convertible preferred stock have the right to elect that
a sale of Mpower be treated as a liquidation for these purposes.
A holder of shares of Series B convertible preferred stock may convert
those shares into Mpower common stock at any time. Initially, each share of
Series B convertible preferred stock may be converted into one share of Mpower
common stock. The number of shares of Mpower common stock into which each share
of Series B
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convertible preferred stock can be converted may be adjusted as a result of
stock splits, stock dividends and other issuances of additional stock.
The holders of Series B convertible preferred stock have the right to
require Mpower to redeem the Series B convertible preferred stock after May 4,
2005, or upon a sale of Mpower. The redemption price will be equal to the
greater of:
o $9.00 per share; or
o the value of the common stock into which the Series B convertible
preferred stock is then convertible.
If Mpower fails to redeem all shares of Series B convertible preferred
stock within six months of the date specified by the holders of the Series B
convertible preferred stock, then the holders of the Series B convertible
preferred stock, along with the holders of the Series C convertible preferred
stock, if they then have similar rights, will have the right to elect a majority
of Mpower's board of directors.
Series C Convertible Preferred Stock
The Series C convertible preferred stock, which was issued in December
1999, has the rights and preferences described in the following paragraphs.
Dividends accrue at the rate of 10% per year, are cumulative and must
be paid before any dividends may be paid on Mpower common stock. Except as
described below, accrued dividends will be paid in common stock at the time the
Series C convertible preferred stock is converted into common stock if the
dividends have not been paid before that time.
On any matter submitted to Mpower's stockholders, holders of shares of
Series C convertible preferred stock will be treated as if they hold the number
of shares of Mpower common stock into which their shares of Series C convertible
preferred stock could be converted and will be allowed to vote those shares
along with the holders of Mpower common stock. In addition, the holders of
shares of Series C convertible preferred stock will have the right to approve
any action to:
o increase or decrease the total number of authorized shares of or
issue preferred stock ranking equal or senior to the Series C
convertible preferred stock;
o dispose of assets in excess of a fixed dollar amount, merge or
consolidate or sell Mpower;
o liquidate Mpower;
o alter the terms of the Series C convertible preferred stock in a
manner adverse to the holders of Series C convertible preferred
stock;
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o pay dividends on Mpower common stock or other securities junior to
the Series C convertible preferred stock other than dividends
payable in Mpower common stock;
o enter into transactions with Mpower's affiliates other than
transactions covered by specified exceptions;
o make acquisitions in excess of a fixed dollar amount;
o incur additional debt in excess of fixed amounts;
o make material changes to Mpower's business plan;
o hire a chief executive officer;
o organize subsidiaries or enter into joint ventures unless
specified conditions are met; and
o issue additional Mpower common stock that would result in an
increase in the number of shares of Mpower common stock into which
the Series C convertible preferred stock may be converted.
If Mpower were to take one of these restricted actions without the
approval of the holders of the Series C convertible preferred stock, the holders
of the Series C convertible preferred stock may have the right to require it to
seek a sale of Mpower. To avoid having to sell Mpower if one of the restricted
actions described above is not approved by the holders of Series C convertible
preferred stock, Mpower has the right to redeem the Series C convertible
preferred stock at predetermined prices. If Mpower elects not to redeem the
Series C convertible preferred stock and the required sale of Mpower is not
effected within six months, then the holders of the Series C convertible
preferred stock (along with the holders of Series B convertible preferred stock,
if any, and if they then have similar rights) would be entitled to elect a
majority of Mpower's board of directors.
The approval rights described above will terminate if fewer than
416,667 shares of Series C convertible preferred stock remain outstanding.
The holders of the Series C convertible preferred stock approved the
issuance of the Mpower common stock to be exchanged in the merger.
The holders of the Series C convertible preferred stock have the right
to representation on Mpower's board of directors as discussed below under
"--Series B and C Preferred Stock Board Representation."
Upon Mpower's liquidation, the holders of the Series C convertible
preferred stock are entitled to receive their liquidation amount on a pro rata
basis with the holders of any series of preferred stock which ranks equally with
the Series C convertible
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preferred stock and before any amounts may be paid to holders of Mpower common
stock or any other junior securities. The liquidation amount will be the greater
of (a) $28.00 per share plus the greater of $2.80 per share or the accrued and
unpaid dividends or (b) the amount the holders of Series C convertible preferred
stock would have received if the Series C convertible preferred stock had been
converted into Mpower common stock. The holders of the Series C convertible
preferred stock have the right to elect that a sale of Mpower be treated as a
liquidation for these purposes. If the liquidation or sale occurs before June
30, 2002, the accrued dividends will not be paid to the extent the holders of
Series C convertible preferred stock will receive more than $58.80 per share.
A holder of shares of Series C convertible preferred stock may convert
those shares into Mpower common stock at any time. Initially, each share of
Series C convertible preferred stock may be converted into one share of Mpower
common stock. The number of shares of Mpower common stock into which each share
of Series C convertible preferred stock can be converted may be adjusted as a
result of stock splits, stock dividends and other issuances of additional stock.
After the earlier of January 19, 2001, or the date on which the holders
of Series B convertible preferred stock, if any, or Series C convertible
preferred stock exercise their demand registration rights, which are discussed
below, Mpower has the right to require the conversion of the Series C
convertible preferred stock if the price of Mpower common stock exceeds $56.00
per share for 20 consecutive trading days. If Mpower requires conversion before
June 30, 2002, no accrued dividends in excess of $2.80 per share will be paid.
The holders of Series C convertible preferred stock have the right to
require Mpower to redeem the Series C convertible preferred stock after December
30, 2005 or upon a sale of Mpower. The redemption price will be equal to the
greater of:
o $28.00 per share plus the greater of $2.80 per share or accrued
and unpaid dividends; or
o the value of the Mpower common stock into which the Series C
convertible preferred stock is then convertible.
If Mpower fails to redeem all shares of Series C convertible preferred
stock within six months of the date specified by the holders of the Series C
convertible preferred stock, then the holders of the Series C convertible
preferred stock (along with the holders of Series B convertible preferred stock,
if any, and if they then have similar rights) will have the right to elect a
majority of Mpower's board of directors.
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Series B and C Preferred Stock Board Representation
The holders of Series B convertible preferred stock, if any, and Series
C convertible preferred stock, voting together, have the right to nominate two
or more directors depending on the size of Mpower's board of directors and the
percentage of Mpower's stock represented by the holders' Series B convertible
preferred stock, if any, Series C convertible preferred stock and common stock
received upon conversion of the Series B convertible preferred stock or Series C
convertible preferred stock. The holders of Series B convertible preferred
stock, if any, and Series C convertible preferred stock also have the right to
have one of their board representatives serve on each committee of Mpower's
board of directors and on the board of each of Mpower's subsidiaries. The
holders of Series B convertible preferred stock, if any, and Series C
convertible preferred stock are entitled to nominate two directors. Paul J.
Salem and Mark J. Masiello have been elected to the board of directors after
being designated by the holders of Series B convertible preferred stock and the
holders of Series C convertible preferred stock.
The right to nominate directors will terminate if fewer than 1,759,260
shares of Series B convertible preferred stock remain outstanding, fewer than
416,667 shares of Series C convertible preferred stock remain outstanding and
the shares of Series B convertible preferred stock, Series C convertible
preferred stock and Mpower common stock issued upon conversion of the Series B
convertible preferred stock or Series C convertible preferred stock constitute
less than 5% of the outstanding common stock assuming conversion of all
outstanding shares of Series B convertible preferred stock and Series C
convertible preferred stock.
Series D Convertible Preferred Stock
The Series D convertible preferred stock has the rights and preferences
described in the following paragraphs.
Dividends accrue on the liquidation amount of $50.00 per share at the
rate of 7.25% per year, which is equivalent to $3.625 per year, and are payable
quarterly commencing on May 15, 2000, and must be paid before any dividends may
be paid on Mpower common stock. At Mpower's option, dividends may be paid in
cash or in shares of Mpower common stock.
The holders of Series D convertible preferred stock have no voting
rights, except as otherwise required under Nevada law or as provided in the
certificate of designation.
The holders of the outstanding shares of Series D convertible preferred
stock, voting separately, and as a class together with the holders of any stock
that ranks equally with the Series D convertible preferred stock upon which like
rights have been conferred and are exercisable, will be entitled to elect to
serve on Mpower's board of directors the lesser of: (a) two additional members
to the board of directors or (b) that number of directors constituting at least
25% of the members of the board of directors, if:
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o dividends on the Series D convertible preferred stock are in
arrears and unpaid for six or more dividend periods, whether or
not consecutive;
o Mpower fails to redeem all of the Series D convertible preferred
stock in cash on February 15, 2012, the mandatory redemption date;
or
o Mpower fails to offer to repurchase or, if the offer to repurchase
is accepted, to repurchase shares of Series D convertible
preferred stock if a non-stock change of control (as described
below) occurs, each referred to as a voting rights triggering
event.
The number of members of the board of directors will be immediately and
automatically increased by that number directors elected by the Series D
convertible preferred stock. The voting rights of the Series D convertible
preferred stock will continue until all voting rights triggering events are
cured or waived, at which time, the term of any directors elected pursuant to
the provisions of this paragraph will terminate and the number of directors
constituting the board of directors will be immediately and automatically
decreased by that number.
Without the approval of the holders of at least 66 2/3% of the then
outstanding shares of Series D convertible preferred stock, Mpower may not amend
the change of control provisions of the Series D convertible preferred stock.
Without the approval of the holders of at least a majority of the then
outstanding shares of Series D convertible preferred stock, Mpower may not:
o amend the certificate of designation so as to affect adversely the
specified rights, preferences, privileges or voting rights of
holders of shares of the Series D convertible preferred stock;
o increase or decrease the total number of authorized shares of
Series D convertible preferred stock;
o waive any voting rights triggering event or compliance with any
provision of the Series D convertible preferred stock; or
o enter into specified merger, consolidation or asset sale
transactions.
Upon Mpower's liquidation, the holders of the Series D convertible
preferred stock are entitled to receive their liquidation amounts plus
accumulated and unpaid dividends, if any, on a pro rata basis with the holders
of any series of preferred stock which ranks equally with the Series D
convertible preferred stock and before any amounts may be paid to holders of
Mpower common stock or other junior securities. The liquidation amount is $50.00
per share.
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A holder of shares of Series D convertible preferred stock may convert
those shares into Mpower common stock at any time. Initially, each share of
Series D convertible preferred stock may be converted into 0.7652 shares of
Mpower common stock at a conversion price of $65.34 per share. The conversion
price and number of shares may be adjusted as a result of stock splits, stock
dividends, exchange or tender offers and other issuances of additional stock or
non-stock distributions.
On or after February 15, 2003, Mpower may, at its option, cancel the
conversion rights of the Series D convertible preferred stock. Mpower may only
exercise this option if the closing price of Mpower common stock equals or
exceeds 140% of the conversion price for at least 20 trading days within any 30
trading day period.
On February 15, 2012, Mpower will be required to redeem all of the
outstanding shares of the Series D convertible preferred stock at a redemption
price, payable in cash, equal to the liquidation amount plus accumulated and
unpaid dividends, if any, whether or not declared, to the date of redemption.
On or after February 15, 2002, but before February 15, 2003, if the
closing price of Mpower common stock equals or exceeds 150% of the conversion
price for at least 20 trading days within any 30 trading day period, Mpower may
redeem Series D convertible preferred stock, which is referred to as a
provisional redemption. If Mpower redeems the Series D convertible preferred
stock, the redemption price will be 105.8% of the liquidation amount, plus
accumulated and unpaid dividends, if any, whether or not declared, to the date
of the provisional redemption.
If Mpower undertakes a provisional redemption, the holders of shares of
Series D convertible preferred stock called for redemption also will receive an
additional payment in an amount equal to the present value of the dividends that
would have been payable on the Series D convertible preferred stock for the
period from the date of the provisional redemption to February 15, 2003.
Mpower may pay the redemption price, including any additional payment
in cash or, at its option, if Mpower satisfies conditions specified in the
certificate of designation for the Series D convertible preferred in shares of
Mpower common stock or a combination thereof.
Upon the occurrence of a non-stock change of control, as described in
the certificate of designation, each holder of Series D convertible preferred
stock will have the right, at the holder's option, to require Mpower to
repurchase all of its shares of Series D preferred stock at a repurchase price
specified in the certificate of designation. Mpower may pay the repurchase price
in cash or, at its option, if Mpower satisfies conditions specified in the
certificate of designation for the series D convertible preferred stock in
Mpower common stock. If the terms of Mpower's outstanding indebtedness restrict
its ability to repurchase the Series D convertible preferred stock following a
non-stock change of control, each holder will have the right to convert its
shares of Series D convertible preferred stock into shares of Mpower common
stock at the conversion
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price specified in the certificate of designation for the Series D convertible
preferred stock.
Upon the occurrence of a common stock change of control, as defined in
the certificate of designation, each share of Series D convertible preferred
stock will be convertible solely into Mpower common stock of the kind received
by the holders of common stock as the result of the common stock change of
control, at the conversion price specified in the certificate of designation for
the Series D convertible preferred stock.
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COMPARISON OF STOCKHOLDER RIGHTS
As a result of the merger, the former stockholders of Primary Network,
a Delaware corporation, will become stockholders of Mpower, a Nevada
corporation. The rights of Mpower stockholders are governed by its articles of
incorporation, its by-laws and the NRS. The rights of Primary Network
stockholders are currently governed by its certificate of incorporation, its
by-laws and the DGCL. Upon completion of the merger, the rights of Primary
Network stockholders who become Mpower stockholders will be governed by the
Mpower articles of incorporation and by-laws and the NRS.
The following paragraphs summarize certain differences between the
Mpower common stock and the Primary Network common stock. While we believe that
this description covers the material differences between the two, this summary
may not contain all of the information that is important to you. You should read
carefully this entire document and other documents Mpower and Primary Network
refer you to, including the certificates or articles of incorporation, as
applicable, and the by-laws of each company, and the NRS and the DGCL, for a
more complete understanding of the differences between Mpower common stock and
Primary Network common stock. You may obtain the information incorporated by
reference into this Proxy Statement/Prospectus without charge by following the
instructions in the section entitled "Where You Can Find More Information" on
page 114.
Board of Directors
Election of Directors
The Mpower by-laws provide that the directors of Mpower shall be
elected by a plurality of the votes cast by the shares entitled to vote for the
election of directors. The Primary Network by-laws provide that directors of
Primary Network are elected by a plurality of the votes cast by the shares
entitled to vote for the election of directors. The Primary Network certificate
of incorporation expressly denies its stockholders the right to cumulative
voting in the election of directors or for any other purpose.
Number of Directors
Both the NRS and the DGCL provide that the board of directors of a
corporation must consist of at least one director, with the corporation having
the option of specifying a fixed or a variable number of directors within a
fixed range. The Mpower by-laws provide that the number of directors of Mpower
shall not be less than three nor more than nine, as determined from time to time
by the board of Mpower. The Primary Network by-laws provide that the number of
directors of Primary Network shall not be less than five nor more than 20, as
fixed from time to time by resolution of a majority of the whole board of
directors.
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Classification of Directors
Both the Mpower board of directors and the Primary Network board of
directors are divided into three classes and directors in each class are elected
for a staggered term of three years.
Removal of Directors
The Mpower articles of incorporation and by-laws are silent as to the
removal of directors. The NRS provides that any director, or one or more of the
incumbent directors, may be removed from office, with or without cause, by the
vote of stockholders representing not less than two-thirds of the voting power
of the issued and outstanding stock entitled to vote.
The DGCL provides that any director or the entire board of directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors, except (i) in the case
of a corporation whose board is classified, stockholders may effect such removal
only for cause, or (ii) in the case of a corporation which has cumulative
voting, if less than the entire board is to be removed, no director may be
removed without cause if the votes cast against such director's removal would be
sufficient to elect such director if then cumulatively voted at an election of
the entire board of directors, or if there be classes of directors, at an
election of the class of directors of which such director is a part. Since the
Primary Network board is classified, under the DGCL, directors may be removed
only for cause by the holders of a majority of the shares then entitled to vote
at an election of directors.
The Primary Network by-laws provide that directors of Primary Network
may be removed only for cause and by the affirmative vote of the holders of not
less than 80% of all outstanding shares of stock entitled to vote generally in
the election of directors at a special meeting of stockholders called expressly
for that purpose.
Stockholder Meetings
Annual Meetings
The Mpower by-laws provide that annual meetings of the stockholders of
Mpower shall be held between January 1 and June 30, as designated by the board.
Annual meetings of the stockholders of Primary Network shall be held at such
time and place designated by the board of directors of Primary Network.
Calling a Special Meeting
The NRS is silent as to who may call a special meeting of the
stockholders. The Mpower by-laws provide that special meetings of the
stockholders for any purpose may be called only by the Chairman of the board of
directors, the President, the request in writing of a majority of the board of
directors or the request in writing of stockholders
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owning shares representing at least a majority of the stock of Mpower issued and
outstanding and entitled to vote.
Under the DGCL, a special meeting of the stockholders may be called by
the board of directors or by any other person authorized to do so in the
certificate of incorporation or the by-laws. The Primary Network certificate of
incorporation provides that a special meeting of the stockholders may be called
only by the board of directors pursuant to a resolution adopted by the
affirmative vote of a majority of the entire board of directors or by the
Chairman of the board of directors, a Vice Chairman of the board of directors or
the President. The Primary Network by-laws further provide that a special
meeting of the stockholders may be called only by the Chairman of the board, a
Vice-Chairman of the board of directors, the President or by any two members of
the board of directors.
Quorum Requirements
The Mpower by-laws provide that the majority of the shares entitled to
vote, represented in person or by proxy, shall constitute a quorum at any
meeting of the stockholders. The Primary Network by-laws provide that the
holders of a majority of the outstanding shares of each class of stock entitled
to vote at a meeting of the stockholders, present in person or by proxy, shall
constitute a quorum.
Certain Voting Requirements
According to the Mpower by-laws, if a quorum is present, action on any
matter, other than the election of directors, by the stockholders is approved by
an affirmative vote of the majority of shares present and entitled to vote,
unless provided otherwise (a) under the Mpower articles of incorporation, (b)
under the rights and preferences of any class or series of stock authorized or
(c) under the NRS. The Mpower articles of incorporation or by-laws do not
contain any supermajority voting requirements.
Unless otherwise provided by the DGCL, the Primary Network certificate
of incorporation or the by-laws, the affirmative vote of the majority of the
outstanding shares of all classes of stock entitled to vote, present in person
or by proxy at the meeting, is required to approve all matters submitted to the
stockholders, other than the election of directors and certain transactions with
the beneficial owner of 10% or more of Primary Network common stock. The board
of directors, however, may require a larger vote upon any election or matter.
The Primary Network certificate of incorporation requires the vote of
80% of the voting power of the corporation for the approval of certain business
combinations specified in the charter, including certain transactions with the
beneficial owner of 10% or more of Primary Network common stock,
who is referred to as a related person. Business combinations include:
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o any merger, consolidation or share exchange of Primary Network
with or into a related person;
o any sale, lease or other exchange with a related person of 10% or
more of the fair market value of the assets of Primary Network or
assets representing 10% or more of the earning power of Primary
Network;
o any sale, lease or other exchange with Primary Network of 10% or
more of the fair market value of the assets of a related person or
assets representing 10% or more of the earning power of the
related person;
o the issuance or transfer of Primary Network securities to a
related person, other than an issuance or transfer affected on a
pro rata basis to all stockholders of Primary Network;
o any reclassification, recapitalization or other transaction
involving Primary Network that increases the voting power of a
related person;
o the adoption of any plan for the liquidation or dissolution of
Primary Network by a related person;
o the acquisition by a related person of a majority of the voting
power of Primary Network; and
o entering into any agreement, contract or other arrangement
providing for any of the transactions described in the preceding
clauses.
The 80% voting requirement to approve such a transaction does not apply
to a business combination if:
o two-thirds of the continuing directors (as described below)
approve the business combination either before or after the
transaction which resulted in a stockholder becoming a related
person; or
o the consideration to be received by the holders of common stock of
Primary Network is not less than the highest price per share paid
by the related person for any shares of Primary Network common
stock and a proxy statement is filed with the SEC at least 30 days
prior to any vote on such business combination containing certain
disclosures in addition to the disclosures required by the
Exchange Act.
A continuing director is a director who was a member of the board of
Primary Network immediately prior to the time the related person involved in the
business combination became a related person or was designated as a continuing
director at the time of his initial election to the board by two-thirds of the
then continuing directors.
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Stockholder Action by Written Consent
Both the NRS and the DGCL provide that, unless otherwise provided in
the articles or certificate of incorporation, as applicable, or the by-laws, any
action required or permitted to be taken at a meeting of the stockholders may be
taken without a meeting, prior notice or a vote if a written consent is signed
by the minimum number of stockholders required to authorize such action at a
meeting of the stockholders.
Both the Mpower by-laws and the Primary Network certificate of
incorporation and by-laws provide that any action required or permitted to be
taken by the stockholders must be effected at an annual or special meeting of
the stockholders and may not be effected by consent in writing by the
stockholders.
Advance Notice of Stockholder Proposals
The Mpower articles and by-laws and the NRS are silent with respect to
advance notice of stockholder proposals. However, Rule 14a-8 promulgated under
the Exchange Act governs stockholder proposals to be included in the proxy
statements of corporations subject to the reporting requirements of the Exchange
Act. Specifically, Rule 14a-8(e) states that if a stockholder is submitting a
proposal for a corporation's annual meeting, the deadline for submitting such
proposal can be found in the corporation's proxy statement for the previous
year's annual meeting. Rule 14a-8(e)(2) states that the stockholder proposal
must be received at the corporation's principal executive offices not less than
120 calendar days before the date of the corporation's proxy statement released
to stockholders in connection with the previous year's annual meeting. Rule
14a-8(e)(2) further states that if the corporation did not hold an annual
meeting during the previous year, or if the date of the current year's annual
meeting has been changed by more than 30 years from the date of the previous
year's annual meeting, then the deadline is a reasonable time before the
corporation begins to print and its proxy materials.
The Primary Network by-laws provide that a stockholder must give timely
written notice in order to properly bring a proposal before a meeting of the
stockholders or make nominations for the board of directors. To be timely with
respect to an annual meeting of the stockholders, a stockholder's notice must be
given to the secretary of Primary Network not less than 90 days nor more than
120 days prior to the meeting of the stockholders; provided, however, if less
than 100 days' notice or prior public disclosure of the date of the annual
meeting is given or made to the stockholders, a stockholder's notice must be
received by the secretary not later than the close of business on the tenth day
following the day on which notice of the date of the annual meeting was mailed
or such public disclosure was made to the stockholders. To be timely with
respect to a special meeting, a stockholder's notice must be given not less than
ten days immediately following the giving of notice of such special meeting. The
Primary Network by-laws contain requirements as to the form and content of the
stockholder's notice.
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Amendment to Organizational Documents
Certificate or Articles of Incorporation
Under the NRS, unless the articles of incorporation or by-laws provide
otherwise, amendments of the articles of incorporation generally require the
approval of the holders of the majority of the outstanding shares entitled to
vote. The NRS provides that if any proposed amendment, including a proposed
increase or decrease in the number of authorized shares, would alter or change
any preference or any relative or other right given to any class or series of
outstanding shares, then a majority of the outstanding shares of the affected
class or series must approve the amendment. The Mpower articles of incorporation
and by-laws are silent as to the amendment of the articles of incorporation.
Under the DGCL, unless the certificate of incorporation or by-laws
provide otherwise, amendments of the certificate of incorporation generally
require the approval of the holders of the majority of the outstanding shares
entitled to vote. The DGCL provides that if any amendment would increase or
decrease the number of authorized shares of any class or series or the par value
of such shares or would adversely affect the shares of such class or series, a
majority of the outstanding shares of that class or series must approve the
amendment.
The Primary Network certificate of incorporation provides that certain
amendments to the certificate of incorporation require the affirmative vote of
holders of not less than 80% of the combined voting power of the outstanding
shares of stock of Primary Network entitled to vote. These include amendments to
articles relating to preemptive rights and cumulative voting, transactions with
interested directors, a classified board of directors, indemnification of
directors and officers, business combinations with related persons, and
amendment to the certificate of incorporation. An 80% vote is not required,
however, to amend the article relating to business combinations with related
persons if such amendment is recommended to the stockholders by two-thirds of
the continuing directors.
By-laws
The NRS provides that unless the power to amend a corporation's by-laws
is reserved to its stockholders by its articles of incorporation, the by-laws
may be amended by the board of directors. The Mpower by-laws contain no such
reservation and provide that the Mpower by-laws may be amended at any meeting of
the board of directors by the affirmative vote of a majority of the directors.
The DGCL provides that the stockholders of a corporation entitled to
vote have the power to adopt, amend or repeal the by-laws of a corporation. The
Primary Network by-laws provide that the by-laws may be amended by the board of
directors or by the affirmative vote of the holders of not less than 80% of the
combined voting power of the outstanding shares of stock entitled to vote
generally in the election of directors, voting together as a single class.
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Capitalization
Authorized Stock
According to the Mpower articles of incorporation, Mpower is authorized
to issue 60 million shares of common stock, par value $.001 per share, and 50
million shares of preferred stock, $.001 per share.
According to the Primary Network certificate of incorporation, Primary
Network is authorized to issue 80 million shares of common stock, par value
$.001 per share, and 20 million shares of preferred stock, par value $.001 per
share.
Preferred Stock
According to the Mpower articles of incorporation, the board is
authorized to divide the preferred stock into series and to fix the relative
rights and preferences of the shares of each series of preferred stock of
Mpower.
According to the Primary Network certificate of incorporation, the
board is authorized to issue preferred stock from time to time in one or more
series, with the terms to be fixed by the board.
Exculpation and Indemnification of Directors, Officers and Employees
Both the NRS and the DGCL provide that a corporation shall indemnify
the expenses incurred by any director, officer, employee or agent that has been
successful on the merits or otherwise in defense of any action, suit or
proceeding. The NRS and the DGCL further provide that indemnification may be
made by a corporation upon a determination that indemnification of a former or
present director, officer, employee or agent is proper because that person acted
in good faith and in a manner the person believed to be in or not opposed to the
best interest of the corporation. Under the NRS, this determination must be made
by (i) the stockholders, (ii) the board of directors by a majority vote of a
quorum consisting of directors who were not parties to the action, suit or
proceeding, (iii) by independent legal counsel in a written opinion of a
majority vote if a quorum consisting of directors who were not parties to the
action, suit or proceeding so orders or (iv) by independent legal counsel in a
written opinion if a quorum consisting of directors who were not parties to the
action, suit or proceeding cannot be obtained. Under the DCGL, this
determination must be made by (a) a majority vote of disinterested directors,
even if less than a quorum, (b) a committee of disinterested directors
designated by a majority vote of the disinterested directors, even if less than
a quorum, (c) independent legal counsel in a legal opinion if there are no
disinterested directors or (d) the stockholders.
The Mpower articles of incorporation provide that the personal
liability of Mpower's directors and officers for damages for any breach of
fiduciary duties in such capacity is eliminated to the fullest extent permitted
by the NRS, except for acts or
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omissions which involve intentional misconduct, fraud or a knowing violation of
the law or the payment of dividends in violation of the NRS.
The Mpower articles of incorporation and by-laws provide that Mpower
will indemnify any director or officer for any liability and legal expenses,
including attorney fees, judgments, fines and amounts paid in settlement by such
director or officer arising out of his status or actions as a director or
officer if he acted in good faith and in a manner in which he reasonably
believed was in the best interests of Mpower and had no reasonable cause to
believe his conduct was unlawful.
The Mpower by-laws further provide that Mpower will not indemnify any
director or officer until a determination has been made that such director or
officer is entitled to indemnification by (i) a majority vote of a quorum of the
board of directors not a party to the proceeding, (ii) a special independent
legal counsel (a) selected by a majority vote of the board of directors not a
party to the proceeding or (b) if a quorum of the board cannot be obtained, by a
majority vote of the full board of directors, or (iii) the stockholders,
provided that shares owned or controlled by directors or officers who are
parties to the proceeding may not be counted in the determination. The Mpower
by-laws also provide that Mpower will indemnify any director or officer to the
maximum extent provided by the NRS.
The Primary Network certificate of incorporation provides that no
director will be personally liable for damages for any breach of fiduciary duty
except (i) for breach of the director's duty of loyalty to Primary Network or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) pursuant to the
provision of the DGCL providing for liability of directors for the unlawful
payment of dividends or unlawful stock repurchases or redemptions or (iv) for
any transaction from which the director derived an improper personal benefit.
The Primary Network certificate of incorporation and by-laws provide
that, to the fullest extent permitted by the DGCL, Primary Network will
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal or investigative by reason of the fact that he is or was a
director or officer of Primary Network, or is or was serving at the request of
Primary Network as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise, against expenses, including attorney's
fees, judgments, fines and amounts paid in settlement by him in connection with
such action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in the best interests of Primary Network and had no
reasonable cause to believe his conduct was unlawful.
The Primary Network certificate of incorporation and by-laws further
provide that Primary Network will not indemnify any director or officer until a
determination has been made that such director or officer is entitled to
indemnification by either (i) a majority vote of a quorum of the board of
directors who are not involved in the proceeding, (ii) an independent legal
counsel in a written opinion or (iii) the stockholders.
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The Primary Network by-laws also provide that Primary Network will
indemnify, to the fullest extent permitted by the DGCL or such lesser extent as
the board of directors may provide, employees not covered by the provisions
relating to directors and officers who are or were employees or agents of
Primary Network, or were serving at the request of Primary Network as employees
or agents of another corporation, partnership, joint venture, trust or other
enterprise.
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COMPARISON OF CERTAIN STATUTORY PROVISIONS
Appraisal Rights
Mpower Stockholder Rights
Under the NRS, a stockholder of a Mpower who does not vote in favor of,
or consent in writing to, certain merger transactions, and who demands appraisal
of his shares in connection therewith, may, under varying circumstances, be
entitled to dissenters' rights pursuant to which such shareholder may receive
cash in the amount determined by a Nevada court to be the fair value of his
shares together with a fair rate of interest, if any, in lieu of the
consideration he would otherwise receive in the transaction. The NRS provides
that dissenters' rights are not available with respect to a merger or exchange
by a corporation the shares of which are listed on a national securities
exchange, included in the national market system by the National Association of
Securities Dealers, Inc., or held of record by more than 2,000 holders unless
the articles of incorporation of the corporation issuing the shares provides
otherwise or the holders of the class or series of shares are required under the
plan of merger or exchange to accept for their shares anything other than cash
or owner's interests of the surviving entity or any other entity which was
either listed on a national securities exchange, included in the national market
system by the National Association of Securities Dealers or held of record by
more than 2,000 holders.
Primary Network Stockholder Rights
Primary Network stockholders who oppose the merger will have the right
to dissent and demand appraisal of, and to receive payment in cash of the fair
market value of, their shares of Primary Network common stock as set forth in
the DGCL.
A Primary Network stockholder is entitled to a judicial determination
of the fair value required to be paid in cash to such dissenting holders for
their shares of Primary Network common stock if such stockholder:
o holds shares of Primary Network common stock on the record date
for the special meeting;
o delivers to Primary Network prior to the special meeting a written
notice that such stockholder intends to demand the appraisal of
such stockholder's shares of Primary Network common stock;
o has neither voted in favor of nor consented to in writing the
merger;
o holds such shares of Primary Network common stock until the
effective date of the merger; and
o otherwise complies with the provisions of Section 262 of the DGCL.
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Any such judicial determination of the fair value of the shares of
Primary Network common stock could be based upon factors other than, or in
addition to, the price per share of Primary Network common stock to be paid by
Mpower in the merger or the market value of the shares of Primary Network common
stock, including asset values and the investment value of the shares of Primary
Network common stock. The value so determined could be more or less than the
price per share paid to the holders of Primary Network common stock who do not
exercise their appraisal rights under the DGCL.
If any holder of shares of Primary Network common stock who demands
appraisal under Section 262 of the DGCL fails to perfect, or effectively
withdraws or loses his right to appraisal, as provided in the DGCL, the shares
of Primary Network common stock of such holder will be converted into shares of
Mpower common stock in accordance with the terms of the merger agreement. A
stockholder may withdraw his demand for appraisal by delivery to the Primary
Network of a written withdrawal of his demand for appraisal and acceptance of
the merger.
In order for a Primary Network stockholder to avail himself of his
appraisal rights, he must deliver to Primary Network before the vote on the
merger a written demand for appraisal of his shares. Within ten days of the
consummation of the merger, the surviving corporation will notify the dissenting
stockholder that the merger has been consummated. Within 120 days after the
effective date of the merger, the dissenting stockholder must file a petition in
the Delaware Court of Chancery demanding a determination of the value of the
Primary Network stock held by him. The dissenting stockholder is entitled to
receive from the surviving corporation a statement setting forth the aggregate
number of shares not voted in favor of the merger and with respect to which
demands for appraisal have been received and the aggregate number of holders of
such shares. After the filing of a petition with the Court of Chancery, the
Register in Chancery, if ordered by the court, will fix a time and date for the
hearing of the petition. At the hearing, the court will determine which
stockholders have appraisal rights and will appraise the shares, together with a
fair rate of interest, if any, to be paid upon the amount determined to be the
fair value. The court will order the payment of the fair value of the shares by
the surviving corporation.
The foregoing discussion is not a complete statement of law pertaining
to appraisal rights under the DGCL and is qualified in its entirety by reference
to the full text of Section 262 of the DGCL attached to the Proxy
Statement/Prospectus at Annex E. FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION
262 OF THE DGCL FOR PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH
RIGHTS.
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Certain Business Combinations
Mpower Stockholder Rights
The NRS prohibits a Nevada corporation from engaging in certain
combinations with an interested stockholder. With certain exceptions, an
interested stockholder is generally defined as a person or group, or its
affiliates, which collectively owns 10% or more of a corporation's outstanding
voting stock or is an affiliate or associate of the corporation and was the
owner of 10% or more of a corporation's voting stock at any time within the
previous three years. The term combination is defined broadly to include:
o mergers or consolidations with the interested stockholder or any
other corporation which is, or after the merger or consolidation
would be, an affiliate or associate of the interested stockholder;
o sales or other dispositions to the interested stockholder, or any
affiliate or associate of the interested stockholder, of assets of
the corporation or a subsidiary equal to (i) 5% or more of the
aggregate market value of the corporation's consolidated assets or
its outstanding stock or (2) 10% or more of the corporation's
consolidated earning power or net income;
o the issuance or transfer by the corporation or a subsidiary of
stock of the corporation or the subsidiary having an aggregate
market value equal to 5% or more of the aggregate outstanding
stock of the corporation to the interested stockholder, except for
the exercise of warrants or rights to purchase shares offered, or
a dividend or distribution paid or made, pro rata to all
stockholders of the corporation;
o the adoption of any plan or proposal for the liquidation or
dissolution of the corporation proposed by, or under agreement
with, the interested stockholder or any affiliate or associate of
the interested stockholder;
o a reclassification, recapitalization, merger, consolidation or
other similar transaction, whether or not with, proposed by or
under agreement with the interested stockholder, which has the
effect of increasing the proportionate share of the outstanding
shares of any class or series of the corporation's outstanding
stock owned by the interested stockholder or any affiliate or
associate of the interested stockholder, except for immaterial
changes because of adjustments of fractional shares; or
o receipt by the interested stockholder, except proportionately as a
stockholder, directly or indirectly, of any loans, advances,
guarantees, pledges or other financial benefits provided by or
through the corporation or a subsidiary.
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The NRS prevents combinations with an interested stockholder for three
years from the date of the interested stockholder's acquisition of the shares of
the corporation, unless prior to the date on which the person becomes an
interested stockholder, the board of directors approves the combination or the
transaction that resulted in such person becoming an interested stockholder.
Furthermore, the NRS prohibits combinations with an interested
stockholder after the expiration of the three-year moratorium unless:
o the holders of stock representing a majority of the outstanding
voting power of the corporation not beneficially owned by the
interested stockholder proposing the combination, or any affiliate
or associate of the interested stockholder, approves the
combination at a meeting called for that purpose no earlier than
three years after the interested stockholder became such;
o the aggregate amount of cash and the market value, as of the date
of the consummation of the combination, of the consideration other
than cash to be received per share by all of the holders of common
stock not beneficially owned by the interested stockholder is at
least equal to the higher of (A) the highest price per share paid
by the interested stockholder, at a time when he was the
beneficial owner of 5% or more of the outstanding voting stock of
the corporation, for any common shares of the same class or series
acquired by him within three years immediately before the date of
the announcement with respect to the combination or within three
years immediately before the transaction in which he became an
interested stockholder, whichever is higher, plus compounded
interest or (B) the market value per share of common stock on the
date of the announcement with respect to the combination or the
interested stockholder's date of acquiring shares, whichever is
higher, plus interest; or
o the aggregate amount of cash and the market value, as of the date
of the consummation of the combination, of the consideration other
than cash to be received per share by all of the holders of shares
other than common stock not beneficially owned by the interested
stockholder is at least equal to the higher of (A) the highest
price per share paid by the interested stockholder, at a time when
he was the beneficial owner of 5% or more of the outstanding
voting stock of the corporation, for any common shares of the same
class or series acquired by him within three years immediately
before the date of the announcement with respect to the
combination or within three years immediately before the
transaction in which he became an interested stockholder,
whichever is higher, plus compounded interest, (B) the highest
preferential amount per share to which the holders of shares of
the class or series of shares are entitled in the event of any
voluntary liquidation, dissolution or winding up of the
corporation, plus the aggregate amount of any dividends declared
or due to which the holders are entitled before payment on another
class or series of shares or (C) the market value per share of the
class
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or series of stock on the date of the announcement with respect to
the combination or the interested stockholder's date of acquiring
shares, whichever is higher, plus interest.
Although Nevada corporations may elect to opt out of these provisions
by amending their articles of incorporation, such amendment would not be
effective until 18 months after the stockholder vote approving it. Mpower has
not elected to opt out of these provisions and, therefore, is subject to these
provisions.
Primary Network Stockholder Rights
Delaware law restricts the ability of certain persons to acquire
control of a Delaware corporation.
Under Section 203, an interested stockholder, generally defined as a
person owning 15% or more of a corporation's outstanding voting stock, is
prevented from engaging in a business combination with the corporation for three
years after becoming an interested stockholder unless:
o prior to such time, the board of directors approved either the
business combination or the transaction in which the interested
stockholder became an interested stockholder;
o upon consummation of the transaction in which the person became an
interested stockholder, the interested stockholder became an 85%
owner of the voting stock of the corporation in the transaction,
excluding voting stock owned by directors who are also officers
and certain employee stock plans; or
o the transaction is approved by the board of directors and by the
affirmative vote of 66 2/3% of the outstanding voting stock, which
is not owned by the interested stockholder.
Primary Network is not subject to Section 203 of the DGCL because it
does not have a class of voting stock that is (i) listed on a national
securities exchange, (ii) authorized for quotation on the NASDAQ stock market or
(iii) held of record by more than 2,000 stockholders. However, the Primary
Network certificate of incorporation contains a provision similar to Section 203
of the DGCL described above in the section "Comparison of Stockholder Rights -
Stockholder Meetings - Certain Voting Requirements."
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Control Share Acquisitions
Mpower Stockholder Rights
The NRS also regulates tender offers and business combinations
involving Nevada corporations by providing that any acquisition by a person,
either directly or indirectly, of ownership of, or the power to direct the
voting of, 20% or more of the outstanding voting securities of a corporation is
an acquisition of a controlling interest. The shares purchased in an acquisition
of a controlling interest are referred to as control shares. Before the control
shares may be voted, such an acquisition must be approved at a special meeting
of either:
o the holders of a majority of the voting power of the corporation,
excluding those shares as to which any interested stockholder
exercises voting rights; or
o if the acquisition will result in any change of a preference or
any relative or other right given to any class or series of
outstanding shares, then it must be approved by the holders of a
majority of each class or series affected, excluding those shares
as to which any interested stockholder exercises voting rights.
This special meeting of the stockholders must be held by the
corporation to approve an acquisition of a controlling interest within 50 days
after a request for such meeting is submitted by the person seeking to acquire
control.
If the control shares are accorded full voting rights and the acquiring
person has acquired control shares with a majority or more of the voting power
of the corporation, all stockholders who have not voted in favor of granting
full voting rights to the control shares have dissenters' rights.
The NRS further provides that a corporation may opt out of these
provisions by expressly specifying in its articles of incorporation or bylaws
that these provisions do not apply. Mpower has not opted out of these
provisions.
Primary Network Stockholder Rights
The DGCL does not contain an equivalent control share provision.
Constituency Provisions
Mpower Stock Holder Rights
The NRS contains a provision that provides that directors and officers
of a corporation, in exercising their respective powers with a view to the
interests of the corporation, may consider, in addition to the interests of the
common stockholders of a corporation, any of the following:
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o the interests of the corporation's employees, suppliers, creditors
and customers;
o the economy of the state of Nevada and the nation;
o the interests of the community and of society; and
o the long-term as well as short-term interests of the corporation
and its stockholders, including the possibility that these
interests may best be served by the continued independence of the
corporation.
The NRS further provides that directors and officers are not required
to consider the effect of a proposed corporate action upon any particular group
having an interest in the corporation as a dominant factor.
Primary Network Constituency Provisions
The DGCL does not contain an equivalent provision requiring that the
directors of a corporation consider the interests of any other constituency
other than the common stockholders of a corporation.
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LEGAL MATTERS
The validity of Mpower's common stock to be issued in connection with
the merger will be passed upon by Lionel, Sawyer & Collins, counsel to Mpower.
Certain U.S. federal tax matters relating to the merger will be passed upon by
Shearman & Sterling, special counsel to Mpower, and Milbank, Tweed, Hadley &
McCloy LLP, special counsel to Primary Network.
EXPERTS
The audited consolidated financial statements of Mpower and its
subsidiaries incorporated by reference in this Proxy Statement/Prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The financial statements of CDM On-Line, Inc. (the Predecessor) at
December 31, 1997, December 31, 1998, and May 31, 1999, and for each of the two
years in the period ended December 31, 1998, and for the period January 1, 1999
to May 31, 1999, as well as the consolidated financial statements of Primary
Network Holdings, Inc. (the Successor), at September 30, 1999, and for the
period June 1, 1999 to September 30, 1999, included in the Proxy
Statement/Prospectus and Registration Statement of MGC Communications, Inc.,
which is referred to and made a part of this Prospectus, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
(of which the May 31, 1999 and September 30, 1999 reports contain an explanatory
paragraph describing conditions that raise substantial doubt about the
Predecessor and Successor companies' ability to continue as a going concern as
described in Note 1 in each of these respective financial statements) appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
Mpower is subject to the informational requirements of the Exchange Act
and, in accordance therewith, files annual, quarterly and special reports, proxy
statements and other information with the SEC. The reports, proxy statements and
other information Mpower files with the SEC can be viewed electronically through
the SEC's Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The
SEC maintains a World Wide Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC. You may read and copy any reports,
statements or other information Mpower files at the SEC's public reference room
at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's Regional
Offices located at 7 World Trade Center, 13th floor, New York, New York 10048
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference rooms.
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Mpower has filed with the SEC a registration statement on Form S-4 to
register the shares of Mpower common stock to be issued to stockholders of
Primary Network pursuant to the merger. This Proxy Statement/Prospectus is a
part of that registration statement. This Proxy Statement/Prospectus does not
contain all of the information set forth in that registration statement,
selected portions of which are omitted in accordance with the rules and
regulations of the SEC. For further information with respect to Mpower and the
Mpower common stock to be issued in connection with the merger, reference is
made to that registration statement (including its exhibits and schedules).
The SEC allows us to "incorporate by reference" information into this
Proxy Statement/Prospectus, which means that we can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be a part of
this Proxy Statement/Prospectus, except for any information superseded by
information contained directly in this Proxy Statement/Prospectus. This Proxy
Statement/Prospectus incorporates by reference the documents set forth below
that Mpower has previously filed with the SEC. These documents contain important
information about Mpower and its financial condition.
Documents incorporated by reference are available without charge upon
request to: General Counsel, Mpower Communications Corp., 171 Sully's Trail,
Suite 202, Pittsford, NY 14534, telephone: (716) 218-6550. In order to ensure
timely delivery of any documents prior to the Primary Network special meeting,
any request for documents should be submitted no later than _____________, 2000.
The following documents filed with the SEC by Mpower are incorporated
herein by reference:
(i) Mpower's Annual Report on Form 10-K for the year ended December
31, 1999;
(ii) Mpower's Proxy Statement for the Annual Meeting of the
Shareholders held on May 21, 1999;
(iii) Mpower's Quarterly Reports on Form 10-Q for the periods ended
March 31, 1999, June 30, 1999, and September 30, 1999;
(iv) Mpower's Current Reports on Form 8-K dated March 13, 2000, March
27, 2000, April 17, 2000 and May 4, 2000;
(v) Registration Statement on Form S-1, dated April 1, 1998; and
(vi) Registration Statement on Form S-4, dated August 18, 1997.
All documents filed by Mpower pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 from the date of this Proxy
Statement/Prospectus to _____________, 2000, the date of the Primary Network
special meeting, shall also be deemed to be incorporated herein by reference.
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This registration statement is a prospectus of Mpower and is a proxy
statement of Primary Network for the Primary Network special meeting. Mpower has
supplied all of the information contained in, or considered a part of, this
Proxy Statement/Prospectus relating to Mpower, and Primary Network has supplied
all of the information contained in, or considered a part of, this Proxy
Statement/Prospectus relating to Primary Network.
No persons have been authorized to give any information or to make any
representations other than those contained in this Proxy Statement/Prospectus in
connection with the Mpower common stock to be issued in connection with the
merger and, if given or made, such information or representation must not be
relied on as having been authorized. This Proxy Statement/Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, any
securities in any jurisdiction in which, or any person to whom, it would be
unlawful to make such an offer or solicitation. Neither the delivery of this
Proxy Statement/Prospectus nor any distribution of securities made hereunder
shall under any circumstances create an implication that there has been no
change in the affairs of Mpower or Primary Network since the date of this Proxy
Statement/Prospectus or that the information in this document is correct as of
any time subsequent to this date.
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ANNEX A - MERGER AGREEMENT
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Annex A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of April 17, 2000, by and among
MPOWER COMMUNICATIONS CORP. (A/K/A MGC COMMUNICATIONS, INC.), a Nevada
corporation ("Parent"), MPOWER MERGER SUB, INC., a Delaware corporation and a
wholly owned subsidiary of Parent (the "Merger Subsidiary"), and PRIMARY NETWORK
HOLDINGS, INC. (the "Company"), a Delaware corporation.
WHEREAS, Parent desires to acquire the Company, and the Company desires
that Parent acquire the Company, all on the terms and conditions set forth in
this Agreement;
WHEREAS, it is the intention of the parties that the Merger (as defined
below) shall qualify as a tax free reorganization under Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and that this Agreement
shall constitute a "plan of reorganization" within the meaning of Section 368 of
the Code and the Treasury resolutions thereunder;
WHEREAS, certain shareholders of the Company as named on Schedule
3.5(b) (the "Principal Shareholders") have entered into an agreement with Parent
and the Company (the "Shareholders Agreement") relating to the transactions
contemplated hereby; and
WHEREAS, the Boards of Directors of the Company, Parent and the Merger
Subsidiary have approved and adopted, at meetings of each of such Boards of
Directors, this Agreement and have authorized its execution, and the Principal
Shareholders have agreed to execute the Shareholders Agreement and vote in favor
of the approval and adoption of this Agreement and the Merger (as defined
below).
NOW, THEREFORE, in consideration of the mutual benefits to be derived
from this Agreement and the representations, warranties, conditions and promises
hereinafter contained, the parties to this Agreement hereby agree as follows:
ARTICLE I
THE MERGER
1.1. The Merger. (a) At the Effective Time (as defined in Section 1.1
(b)),the Merger Subsidiary shall be merged with and into the Company (the
"Merger"), in accordance with the General Corporation Law of the State of
Delaware (the "Delaware GCL"), whereupon the separate existence of the Merger
Subsidiary shall cease, and the Company shall be the surviving corporation (the
"Surviving Corporation").
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(b) As soon as practicable after satisfaction or waiver of all
conditions set forth in Articles VIII and IX, the Company and the Merger
Subsidiary will file a certificate of merger (which shall be in form and
substance reasonably satisfactory to the parties hereto) with the Secretary of
State of the State of Delaware (the "Secretary of State") in accordance with
Section 251(c) of the Delaware GCL and make all other filings or recordings
required by the Delaware GCL in connection with the Merger. The Merger shall
become effective when the certificate of merger is duly filed with the Secretary
of State or at such later time and date as is agreed by each of the parties
hereto and is specified in the certificate of merger (the "Effective Time").
(c) From and after the Effective Time, the Surviving Corporation shall
possess all the rights, privileges, powers and franchises and be subject to all
of the restrictions, disabilities, liabilities and duties of the Company, all as
provided in the Delaware GCL.
1.2. Conversion of Shares. At the Effective Time, by virtue of the
Merger and without any action on the part of the Merger Subsidiary or the
Company:
(a) Each share of common stock, par value $.01 per share, of
the Merger Subsidiary outstanding immediately prior to the Effective Time shall
be converted into and become the same number of shares of common stock, par
value $.01 per share, of the Surviving Corporation with the same rights, powers
and privileges as the shares so converted.
(b) Each share of common stock of the Company, par value $.001
per share, and each share of preferred stock of the Company, par value $.001 per
share, (collectively "Company Shares"), issued and outstanding immediately prior
to the Effective Time other than Dissenting Shares (as defined in Section
1.3(d)) shall be converted into the right to receive 0.02022 shares of common
stock, par value $.001 per share of Parent ("Parent Common Stock"), (the "Merger
Consideration").
(c) (i) All stock options outstanding at the Effective Time, whether or
not exercisable and whether or not vested (the "Company Stock Options"), under
the Primary Network Holdings, Inc. Stock Option Plan (the "Company Stock Option
Plan") and those Options listed on Schedule 3.3 hereto, shall remain outstanding
following the Effective Time. At the Effective Time, the Company's obligations
with respect to each Company Stock Option, as amended in the manner described in
the following sentence, shall be assumed by Parent. The Company Stock Options so
assumed by Parent shall continue to have, and be subject to, the same terms and
conditions as set forth in the Company Stock Option Plans and the agreements
pursuant to which such Company Stock Options were issued as in effect
immediately prior to the Effective Time, except that each Company Stock Option
shall be exercisable for a number of shares of Parent Common Stock equal to that
number of shares of Parent Common Stock equal to the product of the
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number of Company Shares covered by such Company Stock Option immediately prior
to the Effective Time multiplied by the Merger Consideration. Parent shall (i)
reserve for issuance the number of shares of Parent Common Stock that will
become issuable upon the exercise of such Company Stock Options pursuant to this
Section 1.2(c) and (ii) promptly after the Effective Time, issue to each holder
of an outstanding Company Stock Option a document evidencing the assumption by
Parent of the Company's obligations with respect thereto under this Section
1.2(c). Nothing in this Section 1.2(c) shall affect the schedule of vesting with
respect to the Company Stock Options to be assumed by Parent as provided in this
Section 1.2(c). In the case of any Company Stock Option to which section 421 of
the Code applies by reason of its qualification under section 422 of the Code
(an "Incentive Stock Option"), the option price, the number of shares
purchasable pursuant to such Incentive Stock Option and the terms and conditions
of exercise of such Incentive Stock Option shall be determined immediately after
the Effective Time in such manner as described above, but shall be modified to
the extent necessary to comply with section 424(a) of the Code.
(ii) As soon as practicable after the Effective Time, the Parent
Common Stock subject to Company Stock Options will be covered by an effective
registration statement on Form S-8 (or any successor form) or another
appropriate form, and Parent shall use its reasonable efforts to maintain the
effectiveness of such registration statement for as long as Company Stock
Options remain outstanding.
(iii) Those certain warrants dated June 1, 1999 to purchase an
aggregate of 4,476,423 Company Shares (the "Company Warrants") shall remain
outstanding following the Effective Time. At the Effective Time, the Company's
obligations with respect to the Company Warrants, as amended in the manner
described in the following sentence, shall be assumed by Parent. The Company
warrants so assumed by Parent shall continue to have, and be subject to, the
same terms and conditions as set forth in the agreement relating to such Company
Warrant shall be exercisable for a number of shares of Parent Common Stock equal
to the product of the number of Company Shares covered by such Company Warrant
immediately prior to the Effective Time multiplied by the Merger consideration.
Parent shall (i) reserve for issuance the number of shares of Parent Common
Stock that will become issuable upon the exercise of such Company Warrants
pursuant to this Section 1.2(c) and (ii) promptly after the Effective Time,
issue to each holder of an outstanding Company Warrant a document evidencing the
assumption by Parent of the Company's obligations with respect thereto under
this Section 1.2(c).
1.3. Surrender of Certificates; Payment of Merger Consideration;
Dissenting Shares. (a) Surrender of Certificates. At the Effective Time, each
certificate (a "Certificate") representing any Company Shares other than
Dissenting Shares shall be canceled and, simultaneously with such cancellation,
a new certificate shall be issued representing the number
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of shares of Parent Common Stock into which the Company Shares formerly held by
such shareholder shall have been converted in the Merger in accordance with
Section 1.2(b) hereof, together with any cash payable in lieu of fractional
shares determined in accordance with Section 1.3(i) hereof.
(b) Prior to the Effective Time, Parent shall designate a bank or trust
company to act as agent paying (the "Paying Agent") in connection with the
Merger to receive the Merger Consideration which Company Shareholders shall
become entitled pursuant to Section 1.2. Such Merger Consideration shall be
invested by the Paying Agent as directed by the Surviving Corporation.
(c) Promptly after the Effective Time, the Surviving Corporation shall
cause to be mailed to each person who was, at the Effective Time, a holder of
record of Company Shares entitled to receive the Merger Consideration pursuant
to Section 1.2 a form of letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon proper delivery of the Certificates to the Paying Agent) and
instructions for use in effecting the surrender of the Certificates pursuant to
such letter of transmittal. Upon surrender to the Paying Agent of a Certificate,
together with such letter of transmittal, duly completed and validly executed in
accordance with the instructions thereto, and such other documents as may be
required pursuant to such instructions, the holder of such Certificate shall be
entitled to receive in exchange therefor the Merger Consideration for each
Company Share formerly evidenced by such Certificate, and such Certificate shall
then be canceled. No interest shall accrue or be paid on the Merger
Consideration payable upon the surrender of any Certificate for the benefit of
the holder of such Certificate. If the payment equal to the Merger Consideration
is to be made to a person other than the person in whose name the surrendered
certificate formerly evidencing Company Shares is registered on the stock
transfer books of the Company, it shall be a condition of payment that the
certificate so surrendered shall be endorsed properly or otherwise be in proper
form for transfer and that the person requesting such payment shall have paid
all transfer and other taxes required by reason of the payment of the Merger
Consideration to a person other than the registered holder of the certificate
surrendered, or shall have established to the satisfaction of the Surviving
Corporation that such taxes either have been paid or are not applicable.
(d) At any time following the sixth month after the Effective Time, the
Surviving Corporation shall be entitled to require the Paying Agent to deliver
to it any Merger Consideration which had been made available to the Paying Agent
and not disbursed to holders of Company Shares (including, without limitation,
all interest and other income received by the Paying Agent in respect of all the
Merger Consideration made available to it), and, thereafter, such holders shall
be entitled to look to the Surviving Corporation (subject to abandoned property,
escheat and other similar laws) only as general creditors thereof with respect
to any Merger Consideration that may be payable upon due surrender of the
Certificates held by them. Notwithstanding the foregoing, neither the Surviving
Corporation nor the Paying Agent shall be
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liable to any holder of a Company Share for any Merger Consideration delivered
in respect of such Share to a public official pursuant to any abandoned
property, escheat or other similar law.
(e) At the close of business on the day of the Effective Time, the
stock transfer books of the Company shall be closed and thereafter there shall
be no further registration of transfers of Shares on the records of the Company.
From and after the Effective Time, the holders of Company Shares outstanding
immediately prior to the Effective Time shall cease to have any rights with
respect to such Company Shares except as otherwise provided herein or by
applicable law.
(f) From and after the Effective Time, each Certificate which prior to
the Effective Time represented Company Shares (other than Dissenting Shares, as
defined in Section 1.3(d)) shall be deemed to represent only the right to
receive the Merger Consideration and the holder of each such Certificate shall
cease to have any rights with respect to the Company Shares formerly represented
thereby other than as provided in this Agreement.
(g) No Fractional Shares. No certificate or scrip representing
fractional shares of Parent Common Stock will be issued in the Merger upon the
surrender for exchange of Certificates, and such fractional share interests will
not entitle the owner thereof to vote or to any rights of a stockholder of
Parent. In lieu of any such fractional shares, each holder of Company Shares who
would otherwise have been entitled to a fraction of a share of Parent Common
Stock in exchange for Certificates pursuant to this Section 1.3 shall receive
from the Surviving Corporation a cash payment in lieu of such fractional share
determined by multiplying (i) the closing price of Parent Common Stock on the
Closing Date by (ii) the fractional share interest to which such holder would
otherwise be entitled.
(h) Dissenting Shares. (i) Notwithstanding any provision of this
Agreement to the contrary, each Company Share, the holder of which has not voted
in favor of the Merger, has perfected such holder's right to seek relief as a
dissenting shareholder in accordance with the applicable provisions of the
Delaware GCL ("Appraisal") and has not effectively withdrawn or lost such right
to Appraisal (a "Dissenting Share") shall not be converted into or represent a
right to receive shares of Parent Common Stock and cash pursuant to Section 1.2,
but the holder thereof shall be entitled only to such rights as are granted by
the applicable provisions of the Delaware GCL; provided, however, that any
Dissenting Share held by a person at the Effective Time who shall, after the
Effective Time, withdraw the demand for or lose the right of Appraisal, in
either case pursuant to the Delaware GCL, shall be deemed to be converted into,
as of the Effective Time, the right to receive the Merger Consideration, and any
cash payable for fractional interests pursuant to paragraph (g) above.
(ii) The Company shall give Parent (x) prompt notice of any written
demands for Appraisal, withdrawals of demands for Appraisal and any other
instruments served pursuant
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to the applicable provisions of the Delaware GCL relating to the Appraisal
process received by the Company and (y) the opportunity to direct all
negotiations and proceedings with respect to demands for Appraisal under the
Delaware GCL. The Company will not voluntarily make any payment with respect to
any demands for Appraisal or, except with the prior written consent of Parent,
settle or offer to settle any such demands. Parent shall be responsible for all
payments with respect to Dissenting Shares, including, without limitation, all
expenses associated with any negotiations and proceedings with respect to
demands for Appraisal under the Delaware GCL.
1.4. Closing. Unless this Agreement shall have been terminated and the
Merger herein contemplated shall have been abandoned pursuant to Section 11.1,
the consummation of the Merger shall take place as promptly as practicable after
satisfaction or waiver of the conditions set forth in Articles VIII and IX
(other than those conditions related to the delivery of certificates, opinions
or documents at the Closing) and in any event within three business days after
such satisfaction or waiver. The closing of the transactions contemplated by
this Agreement (the "Closing") will take place at the offices of Shearman &
Sterling, 599 Lexington Avenue, New York, New York, at 10:00 a.m., or at such
other place as the parties may agree.
ARTICLE II
THE SURVIVING CORPORATION
2.1. Certificate of Incorporation. At the Effective Time, the
Certificate of Incorporation of the Merger Subsidiary in effect at the Effective
Time shall be the Certificate of Incorporation of the Surviving Corporation
until amended in accordance with applicable law, except that the name of the
Surviving Corporation shall initially be Primary Network Holdings, Inc.
2.2. Bylaws. At the Effective Time, the bylaws of the Merger Subsidiary
in effect at the Effective Time shall be the bylaws of the Surviving Corporation
until amended in accordance with applicable law.
2.3. Board of Directors. The Board of Directors of the Surviving
Corporation shall consist of the persons who constitute the Board of Directors
of the Merger Subsidiary as of the Effective Time. The Board of Directors of the
Surviving Corporation shall hold office subject to the provisions of the laws of
the State of Delaware and of the Certificate of Incorporation and bylaws of the
Surviving Corporation.
2.4. Officers. The officers of the Company immediately prior to the
Effective Time shall continue as the officers of the Surviving Corporation in
the same capacity or capacities, each of such officers to serve, subject to the
provisions of the Certificate of
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Incorporation and bylaws of the Surviving Corporation, until his or her
successor is duly elected and qualified.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As an inducement to Parent and the Merger Subsidiary to enter into this
Agreement, the Company hereby represents and warrants to Parent and the Merger
Subsidiary as follows:
3.1. Company's Organization and Good Standing. Each of the
Company and each subsidiary of the Company (the "Company Subsidiaries") is a
corporation duly incorporated, validly existing and in good standing under the
laws of the state of its incorporation and has all corporate power and authority
to own, lease and operate its properties and to carry on its business as now
conducted. Each of the Company and the Company Subsidiaries is duly licensed or
qualified to do business and is in good standing in each jurisdiction where the
character of property owned or leased by it or the nature of its activities
makes such licensing or qualification necessary except for those jurisdictions
where the failure to be so licensed or qualified would not reasonably be
expected, individually or in the aggregate, to have a Company Material Adverse
Effect. As used herein, a "Company Material Adverse Effect" means any event,
circumstance, change in, or effect on, the business of the Company and the
Company Subsidiaries (the "Business") that, when taken together with all other
events, circumstances, changes and effects occurring after the date hereof that
do not individually have a Company Material Adverse Effect and all other
circumstances that would, but for the fact that they do not individually have a
Company Material Adverse Effect, constitute a breach of any representation or
warranty made by the Company in this Agreement: (a) is, or would reasonably be
expected to be, materially adverse, taken as a whole, to the business,
operations, financial condition, results of operations or prospects of the
Business or (b) would reasonably be expected to materially adversely affect the
ability of Parent or the Surviving Company to operate or conduct the Business in
the manner in which it is currently operated or conducted by the Company and the
Company Subsidiaries; provided, however, that "Company Material Adverse Effect"
shall not include events, circumstances, changes or effects (including legal and
regulatory changes) that generally affect the industries in which the Company
operates.
3.2. Power and Authority; Execution and Delivery. The Company has all
requisite corporate power and authority to execute, deliver and perform its
obligations under this Agreement. The execution, delivery and performance of
this Agreement have been duly approved and authorized by all requisite corporate
action of the Company (except for Company Shareholder approval) and such
approval has not been modified or rescinded. Except for the filing of a
certificate of merger in accordance with Section 1.1(b) and approval of the
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shareholders of the Company (the "Company Shareholders") in accordance with the
Delaware GCL, no further corporate actions or approvals on the part of the
Company are required under applicable law for the consummation of the Merger.
This Agreement has been duly executed and delivered by the Company and
constitutes the legal, valid and binding obligation of the Company, enforceable
against it in accordance with its terms subject to the effect of any applicable
bankruptcy insolvency (including, without limitation, all laws relating to
fraudulent transfers), reorganization, moratorium or similar laws affecting
creditors rights generally and subject to the effect of general principles of
equity (regardless of whether considered in a proceeding at law or in equity.
True and correct copies of the Certificate of Incorporation and bylaws of each
of the Company and the Company Subsidiaries, each as in effect on the date
hereof, have been made available by the Company to Parent.
3.3. Capitalization and Voting Rights. (a) The authorized capital of
the Company is as set forth on Schedule 3.3.
(b) The stock register of the Company accurately records (i) the name
and address of each person and entity owning shares of capital stock of the
Company and (ii) the certificate number of each certificate evidencing shares of
capital stock issued by the Company, the number of shares evidenced by each such
certificate, the date of issuance thereof and, in the case of cancellation, the
date of cancellation.
3.4. Subsidiaries. Except as set forth on Schedule 3.4, the Company
does not own or control or have the right to own or control, directly or
indirectly, any interest in any other corporation, association or other business
entity. The Company is not a member of (nor is any part of the Company's
business conducted through) any partnership or limited liability company and it
is not a participant in any joint venture or similar arrangement.
3.5. Valid Issuance of Company Shares; Ownership of Company Shares. All
of the outstanding Company Shares are duly and validly authorized and issued,
fully paid and nonassessable. None of the issued and outstanding Company Shares
was issued in violation of any preemptive rights.
3.6. Financial Statements. (a) The Company has delivered to Parent (i)
unaudited consolidated balance sheets for the Company and the Company
Subsidiaries as of February 29, 2000, January 31, 2000, December 31, 1999 and as
of September 30, 1999 and the related income statement and profit and loss
statements as of and for the quarter ending December 31, 1999; and the four
months ending September 30, 1999; (ii) unaudited balance sheets for Primary
Network Internet, Inc. and Primary Network Communications, Inc. as of May 31,
1999 and the related income statements for the five months ending May 31, 1999;
and (iii) audited balance sheet statements for CDM On-Line, Inc. for the year
ended December 31, 1998 and 1997 and BroadSpan Communications, Inc. for the
years ended December 31, 1998
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and the related statements of operations and cash flows as of and for the 12
months ended December 31, 1998 and 1997, together with all related notes and
schedules thereto, accompanied by the reports thereon of the Company's
accountants (collectively referred to herein as the "Financial Statements"). The
Financial Statements (i) were prepared in accordance with the books of account
and other financial records of the Company and the Company Subsidiaries, (ii)
present fairly, in all material respects, the consolidated financial position,
results of operations and cash flows of the Company and the Company
Subsidiaries, or of such Company Subsidiary, as the case may be, as of the dates
thereof or for the periods covered thereby, (iii) have been prepared in
accordance with United States generally accepted accounting principles and
practices as in effect from time to time ("GAAP") applied on a basis consistent
with the past practices of the Company and the Company Subsidiaries and (iv)
include all adjustments (consisting only of normal recurring accruals) that are
necessary for a fair presentation of the consolidated financial position of the
Company and the Company Subsidiaries, or of such Company Subsidiary, as the case
may be, and the results of the operations and cash flows of the Company and the
Company Subsidiaries, or of such Company Subsidiary, as the case may be, as of
the dates thereof or for the periods covered thereby. The accounts receivable of
the Company and the Company Subsidiaries reflected on the Reference Balance
Sheet (as defined below) and all accounts receivable arising subsequent to such
date are or will be recorded in accordance with GAAP and have arisen, or will
have arisen, from the sale of services to persons not affiliated with the
Company or any Company Subsidiary and in the ordinary course of business
consistent with past practice. Except as reserved against on the Reference
Balance Sheet, the accounts receivable of the Company or Company Subsidiaries
constitute or will constitute only valid, undisputed claims of the Company or
Company Subsidiary not subject to valid claims of set-off or other defenses or
counter claims, subject to the effect of any applicable bankruptcy insolvency
(including, without limitation, all laws relating to fraudulent transfers),
reorganization, moratorium or similar laws affecting creditors rights generally
and subject to the effect of general principles of equity (regardless of whether
considered in a proceeding at law or in equity.)
(b) The aggregate amount of Indebtedness of the Company and the Company
Subsidiaries on the date hereof does not exceed $80,000,000. As used herein
"Indebtedness" means, with respect to any person or entity, (i) all indebtedness
of such person or entity, whether or not contingent, for borrowed money; (ii)
all obligations of such person or entity for the deferred purchase price of
property or services; (iii) all obligations of such person or entity evidenced
by notes, bonds, debentures or other similar instruments; (iv) all obligations
of such person or entity as lessee under leases that have been or should be, in
accordance with GAAP, recorded as capital leases; (v) all obligations,
contingent or otherwise, of such person or entity in respect of acceptances,
letters of credit or similar extensions of credit; (vi) all obligations of such
person or entity in respect of interest rate swap, cap or collar agreements,
interest rate future or option contracts, currency swap agreements, currency
future or option contracts and other similar
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agreements; and (vii) all Indebtedness of others referred to in clauses (i)
through (vi) above guaranteed directly or indirectly in any manner by such
person or entity.
As used herein "Lien" means any security interest, pledge, mortgage,
lien (including, without limitation, environmental and Tax liens), charge,
encumbrance, adverse claim, preferential arrangement or restriction of any kind,
including, without limitation, any restriction on the use, voting, transfer,
receipt of income or other exercise of any attributes of ownership.
3.7. No Undisclosed Liabilities. Except as set forth on Schedule 3.7,
there are no Liabilities of the Company or any Company Subsidiary, other than
Liabilities (a) reflected or reserved against on the February 29, 2000 balance
sheet (the "Reference Balance Sheet") or described in the notes thereto, or (b)
incurred since February 29, 2000 in the ordinary course of the Company's and the
Company Subsidiaries' business, consistent with past practice that individually
or in the aggregate have not had and are not reasonably likely to have a Company
Material Adverse Effect. Reserves are reflected on the Reference Balance Sheet
and on the books of account and other financial records of the Company against
all Liabilities of the Company or any Company Subsidiary in amounts that have
been established on a basis consistent with the past practices of the Company
and in accordance with GAAP. As used herein, "Liabilities" means any and all
Indebtedness, liabilities and obligations, whether accrued or fixed, absolute or
contingent, matured or unmatured or determined or determinable, including,
without limitation, those arising under any Law, Action or Governmental Order
and those arising under any contract, agreement, arrangement, commitment or
undertaking.
3.8. Absence of Certain Changes; Agreements with Affiliates. Since
February 29, 2000, the business of the Company and the Company Subsidiaries has
been conducted in the ordinary course and consistent with past practice. As
amplification and not limitation of the foregoing, except as disclosed on
Schedule 3.8, between February 29, 2000 and the date hereof, there has not been:
(a) any amendment to the Certificate of Incorporation or bylaws of the
Company or any Company Subsidiary;
(b) any Lien imposed on any material assets or properties (whether
tangible or intangible) of the Company or any Company Subsidiary;
(c) any amendment, termination or cancellation by the Company or any
Company Subsidiary of a material claim of the Company or any Company
Subsidiary or a waiver of any other material right to the Company or any
Company Subsidiary or of a material debt owed to it;
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(d) any issuance or authorization of any issuance of any shares of
capital stock of the Company or any Company Subsidiary, or any options,
warrants, convertible securities or other rights relating to the capital
stock of the Company or any Company Subsidiary or redeemed any of the
capital stock or any declaration or payment of any dividend or other
distribution of the assets of the Company or any Company Subsidiary or any
direct or indirect redemption, purchase or acquisition of any securities of
the Company or any Company Subsidiary;
(e) any failure by the Company or any Company Subsidiary to pay any
creditor any material amount owed to such creditor when due, other than
trade payables incurred in the ordinary course of business consistent with
past practice;
(f) any sale, exchange or other disposition of any of the Company's or
any Company Subsidiary's material assets other than in the ordinary course
of business consistent with past practice;
(g) a transaction whereby the Company or any Company Subsidiary merged
with, entered into a consolidation with or acquired any interest in any
person or entity or acquired a substantial portion of the assets or
business of any person or entity or any division or line of business
thereof, or otherwise acquired any material assets other than in the
ordinary course of business consistent with past practice;
(h) except as listed on Schedule 3.8(h) any capital expenditure or
commitment for any capital expenditure exceeding $250,000 in the aggregate;
(i) any increase or an announcement of any increase in the wages,
salaries, compensation, bonuses, incentives, pension or other benefits
payable or to become payable to its officers or employees, including,
without limitation, any increase or change pursuant to any Company Benefit
Plan (as defined in Section 3.16), except for increases in accordance with
past practices in salaries or wages of employees of the Company who are not
officers of the Company, or grant of any severance or termination pay to,
or entry into any employment or severance agreement with any director,
officer or other employee of the Company, or establishment, adoption, entry
into or amendment of any collective bargaining, bonus, profit sharing,
thrift, compensation, stock option, restricted stock, pension, retirement,
deferred compensation, employment, termination, severance or other plan,
agreement, trust, fund, policy or arrangement for the benefit of any
current or former director, officer or employee;
(j) any agreement, arrangement or transaction between the Company or
any Company Subsidiary on the one hand and any of their directors,
officers, employees or shareholders (or with any relative, beneficiary,
spouse or affiliate of such person or
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entity), on the other hand, except for payments of salary or benefits in
the ordinary course consistent with past practice;
(k) any change in any method of accounting or accounting practice or
policy used by the Company, other than such changes required by GAAP and
disclosed in Section 3.8(k) of the Disclosure Schedule;
(l) any express or deemed election or any material Liability settled or
compromised, with respect to Taxes of the Company or any Company
Subsidiary;
(m) any agreements, whether in writing or otherwise, to do or enter
into any of the foregoing; or
(n) any other event or condition of any character which would
reasonably be expected, individually or in the aggregate, to have a Company
Material Adverse Effect.
3.9. Governmental Approvals and Filings. Except for the filings
required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), the filing of a certificate of merger in accordance
with the Delaware GCL, and the filing of a Registration Statement on Form S-4
pursuant to the Securities Act of 1933, as amended (the "Securities Act") with
the Securities and Exchange Commission (the "SEC"), no approval, authorization,
consent, license, clearance or order of, declaration or notification to, or
filing, registration or compliance with, any governmental or regulatory
authority, is required in order to permit the Company to enter into this
Agreement or to consummate the transactions contemplated herein.
3.10. Litigation. (a) Except as set forth on Schedule 3.10, there are
no material claims, actions, suits, arbitrations, inquiries, litigations,
proceedings or investigations by or before any United States federal, state or
local or any foreign government, governmental, regulatory or administrative
authority, agency or commission or any court, tribunal, or judicial body or any
arbitral or other nongovernmental dispute resolution body (each, an "Action")
pending or, to the Company's knowledge, threatened by or against the Company (or
by or against any shareholder or any affiliate thereof and relating to the
business of the Company or any Company Subsidiary) or affecting any of the
Company's or any Company Subsidiary's assets, or that would reasonably be likely
to affect the legality, validity or enforceability of this Agreement or the
transactions contemplated hereby.
(b) Except as set forth on Schedule 3.10, neither the Company nor any
Company Subsidiary is a party or subject to the provisions of any order, writ,
judgment, injunction, decree, stipulation, determination or award entered by or
with any governmental authority or instrumentality (each, a "Governmental
Order") that has not been fully satisfied.
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3.11. Compliance with Laws. Except as would not reasonably be expected,
individually or in the aggregate, to have a Company Material Adverse Effect,
each of the Company and the Company Subsidiaries has conducted its business in
accordance with all federal, state, local or foreign statutes, laws, ordinances,
regulations, rules, codes, orders, other requirements or rules of law (each, a
"Law") and Governmental Orders applicable to the Company and the Company
Subsidiaries or any of the Company's or any Company Subsidiary's assets or
business, and neither the Company nor any Company Subsidiary is in violation of
any such Law or Governmental Order. The Company has provided Parent with copies
of all correspondence since January 1, 1999 with all Governmental Authorities
regarding regulatory status of the Company and the Company Subsidiaries or the
Company's or any Company Subsidiary's business.
3.12. Permits; Compliance. Each of the Company and the Company
Subsidiaries is in possession of all franchises, grants, authorizations,
licenses, permits, easements, variances, exceptions, consents, certificates,
approvals and orders of any Governmental Authority necessary for each of the
Company and the Company Subsidiaries to own, lease and operate its properties or
to carry on its business as it is now being conducted (the "Permits"), except
where the failure to have, or the suspension or cancellation of, any of the
Permits would not prevent or materially delay consummation of the Merger or
otherwise prevent or materially delay the Company from performing its
obligations under this Agreement and would not, individually or in the
aggregate, have a Company Material Adverse Effect. No suspension or cancellation
of any of the Permits is pending or, to the knowledge of the Company,
threatened, except where the failure to have, or the suspension or cancellation
of, any of the Permits would not prevent or materially delay consummation of the
Merger or otherwise prevent or materially delay the Company from performing its
obligations under this Agreement and would not have a Company Material Adverse
Effect. Neither the Company nor any Company Subsidiary is in conflict with, or
in default, breach or violation of any note, bond, mortgage, indenture,
contract, agreement, lease, license, Permit, franchise or other instrument or
obligation to which the Company or any Company Subsidiary is a party or by which
the Company or any Company Subsidiary or any property or asset of the Company or
any Company Subsidiary is bound, except for any such conflicts, defaults,
breaches or violations that would not prevent or materially delay consummation
of the Merger or otherwise prevent or materially delay the Company from
performing its obligations under this Agreement and would not, individually or
in the aggregate, have a Company Material Adverse Effect.
3.13. Intellectual Property. (a) Schedule 3.13(a) contains a complete
list of all material registered trademarks and trademark applications,
proprietary internal processes, technical knowledge and internally developed
software modules of the Company and the Company Subsidiaries.
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(b) Except as set forth on Schedule 3.13(b), the Company or Company
Subsidiary, to the Company's knowledge, either owns all right, title and
interest to, or has a valid right to use, such Intellectual Property as is
material to the Business.
(c) The Company's and the Company Subsidiaries' use of Intellectual
Property does not constitute an infringement of any third party's rights that
would reasonably be expected to have a Material Adverse Effect. Except as
provided on Schedule 3.13(c), no actions or proceedings involving the Company or
the Company Subsidiaries are pending or, to the Company's knowledge, threatened
(i) which challenge the ownership, validity or enforceability of any of its
owned Intellectual Property, (ii) which seek to restrict the use by the Company
or the Company Subsidiaries of any of its owned Intellectual Property, or (iii)
which allege that the Company or the Company Subsidiaries infringes or violates
the Intellectual Property owned by any other person or entity (collectively,
"Third Party Intellectual Property"). No pending or, to the Company's knowledge,
threatened action or proceeding listed on Schedule 3.13 has had, or if
adjudicated against the Company or the Company Subsidiaries would reasonably be
expected to have a Material Adverse Effect.
(d) Except as set forth on Schedule 3.13(d) neither the Company nor any
Company Subsidiary is a party to any outstanding options, licenses or agreements
of any kind relating to the Intellectual Property or the Third Party
Intellectual Property.
(e) In the case of Intellectual Property disclosed to Parent hereunder
as trade secrets or otherwise as confidential or proprietary information, such
Intellectual Property (i) has at all times been maintained in confidence and
(ii) has been disclosed by the Company and the Company Subsidiaries only to
employees and consultants having "a need to know" the contents thereof in
connection with the performance of their duties to the Company and the Company
Subsidiaries.
(f) As used herein, "Intellectual Property" means (i) inventions,
whether or not patentable, whether or not reduced to practice, and whether or
not yet made the subject of a pending patent application or applications; (ii)
ideas and conceptions of potentially patentable subject matter, including,
without limitation, any patent disclosures, whether or not reduced to practice
and whether or not yet made the subject of a pending patent application or
applications; (iii) national (including the United States) and multinational
statutory invention registrations, patents, patent registrations and patent
applications (including all reissues, divisions, continuations,
continuations-in-part, extensions and reexaminations) and all rights therein
provided by international treaties or conventions and all improvements to the
inventions disclosed in each such registration, patent or application; (iv)
trademarks, service marks, trade dress, logos, trade names and corporate names,
whether or not registered, including all common law rights, and registrations
and applications for registration thereof, including, but not limited to, all
marks registered in the United States Patent and Trademark Office, the trademark
offices of the states and territories of the United States of America, and the
trademark offices of other
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nations throughout the world, and all rights therein provided by international
treaties or conventions; (v) copyright (registered or otherwise) and
registrations and applications for registration thereof, and all rights therein
provided by international treaties or conventions; (vi) computer software,
including, without limitation, source code, operating systems and
specifications, data, data bases, files, documentation and other materials
related thereto, data and documentation, (other than commercially available
"shrinkwrap" or "clickwrap" software); (vii) trade secrets and confidential,
technical and business information (including ideas, formulas, compositions,
inventions, and conceptions of inventions whether patentable or unpatentable and
whether or not reduced to practice); (viii) whether or not confidential,
technology (including know-how and show-how), manufacturing and production
processes and techniques, research and development information, drawings,
specifications, designs, plans, proposals, technical data, copyrightable works,
financial, marketing and business data, pricing and cost information, business
and marketing plans and customer and supplier lists and information; (ix) copies
and tangible embodiments of all the foregoing in whatever form or medium; (x)
all rights to obtain and rights to apply for patents, and to register trademarks
and copyrights; and (xi) all rights to sue or recover and retain damages and
costs and attorneys' fees for present and past infringement of any of the
foregoing.
3.14. No Conflict. Except as set forth on Schedule 3.14, neither the
execution, delivery and performance of this Agreement by the Company, nor the
consummation by the Company of the transactions contemplated hereby, will (a)
result in a breach of any of the terms, conditions or provisions of the
Certificate of Incorporation or bylaws of the Company or any Company Subsidiary,
(b) result in a breach or violation of, give rise to a default under or result
in the acceleration of performance under any Material Contract (as defined in
Section 3.15) or any Law or Governmental Order to which the Company or any of
its assets, properties or businesses may be subject, or (c) give rise to an
imposition of any Lien of any nature whatsoever upon any Company Shares or any
of the assets or the properties of the Company or any Company Subsidiary.
3.15. Material Contracts. (a) Schedule 3.15(a) lists, as of the date
hereof, each of the following contracts and agreements of the Company and each
Company Subsidiary (such contracts and the agreements set forth in Schedule
3.15(a) of the Disclosure Schedule, being "Material Contracts"):
(i) each contract and agreement with any supplier or for the furnishing
of services to the Company or any Company Subsidiary related to the
Business (A) under the terms of which the Company or any Company Subsidiary
is likely to pay or otherwise give consideration of more than $250,000 in
the aggregate during any calendar year or more than $500,000 in the
aggregate over the remaining term of such contract and (B) which cannot be
canceled by the Company or any Company Subsidiary without penalty or
further payment and without more than 30 days' notice;
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(ii) each contract and agreement for the furnishing of services by the
Company or any Company Subsidiary that (A) is likely to involve
consideration of more than $250,000 in the aggregate during any calendar
year or more than $500,000 in the aggregate over the remaining term of the
contract and (B) cannot be canceled by the Company or any Company
Subsidiary without penalty or further payment and without more than 30
days' notice;
(iii) all material franchise, agency, sales promotion, royalty, market
research, marketing consulting and advertising contracts and agreements to
which the Company or any Company Subsidiary is a party;
(iv) all material management contracts and contracts with independent
contractors or consultants (or similar arrangements) to which the Company
or any Company Subsidiary is a party and which are not cancelable without
penalty or further payment and without more than 30 days' notice;
(v) all contracts and agreements relating to Indebtedness of the
Company or any Company Subsidiary;
(vi) all material contracts and agreements with any Governmental
Authority to which the Company or any Company Subsidiary is a party;
(vii) all contracts and agreements that limit or purport to limit the
ability of the Company or any Company Subsidiary to compete in any line of
business or with any person or entity or in any geographic area or during
any period of time or would require the Company or any Company Subsidiary
to maintain confidentiality in any matter;
(viii) all contracts and agreements between or among the Company or any
of its affiliates, on the one hand, and any officer or director of the
Company or any Company Subsidiary or any Company Shareholders or any
relative or spouse (or relative of such spouse) of such officer, director
or Company Shareholder, on the other hand;
(ix) all contracts or agreements providing for indemnification
obligations of the Company or any Company Subsidiary;
(x) all contracts, agreements or other arrangements granting to any
person or entity any preferential rights to purchase any assets or
properties of the Company or any Company Subsidiary;
(xi) all contracts, agreements or other arrangements granting to any
person or entity a right to share in the revenues of the Company or any
Company Subsidiary;
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(xii) all contracts, agreements or other arrangements purporting to
grant to any person or entity any exclusive or preferred right to transact
business with the Company or any Company Subsidiary;
(xiii) all contracts, agreements or other arrangements with any
incumbent local exchange carrier involving an aggregate payment in excess
of $250,000;
(xiv) all interconnection agreements, contracts or other arrangements
with any incumbent local exchange carriers providing for the transmission
of telecommunications or internet traffic of any type (including, but not
limited to, local, long distance, and data);
(xv) all contracts, agreements or other arrangements providing for the
setting of rates, settlement or payment of charges for the exchange or
transmission of telecommunications or internet traffic of any type
(including, but not limited to, local, long distance and data);
(xvi) all agreements or contracts required by any governmental entity
as a condition to, or settlement of, any certification, licensing matter,
or complaint against or on behalf of the Company or any Company Subsidiary;
(xvii) all contracts, agreements or other arrangements for the
provision of operator services or operator assistance associated with calls
or the provision of billing, collection, mailing, and/or fulfillment
services of any kind or description;
(xviii) all contracts, agreements or other arrangements relating to
collocation of the Company's equipment; and
(xix) all other contracts and agreements, whether or not made in the
ordinary course of business, which are material to Business or the absence
of which would reasonably be expected, individually or in the aggregate, to
have a Company Material Adverse Effect.
(b) Each Material Contract is valid and binding on the Company or a
Company Subsidiary and, to the Company's knowledge, the other parties thereto
and is in full force and effect. Neither the Company nor any Company Subsidiary
is in material breach of, or material default under, any Material Contract and,
to the Company's knowledge, as of the date hereof, no other party to any
Material Contract is in breach thereof or default thereunder.
(c) The Material Contracts listed on Schedule 3.15 in response to
3.15(a)(viii) above all contain terms as favorable to the Company or the Company
Subsidiaries as if the Company or the Company Subsidiaries had entered into the
Material Contracts with unaffiliated third parties. Each contract or agreement
with to be entered into between the date hereof and the
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Effective Time between or among the Company or any of its affiliates, on the one
hand, and any officer or director of the Company or any Company Subsidiary or
any Company Shareholders or any relative or spouse (or relative of such spouse)
of such officer, director or Company Shareholder on the other hand shall contain
terms as favorable to the Company or the Company Subsidiaries as if the Company
or the Company Subsidiaries had entered into such contract or agreement with
unaffiliated third parties.
3.16. Employee Benefit Plans; Labor Matters. (a) Schedule 3.16(a) lists
each material employee benefit plan, program, arrangement and contract
(including, without limitation, any "employee benefit plan," as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and any employment, severance or change in control plans or
arrangements, maintained or contributed to by the Company (collectively, the
"Company Benefit Plans")).
(b) Except as set forth on Schedule 3.16(b), none of the Company
Benefit Plans promises or provides material retiree medical or life insurance
benefits to any person other than continuous coverage required by COBRA. Each
Company Benefit Plan intended to be qualified under Section 401(a) of the Code
has received a favorable determination letter from the Internal Revenue Service
to the effect that it is so qualified and to the knowledge of the Company,
nothing has occurred since the date of such letter to affect the qualified
status of such plan. None of the Company Benefit Plans is subject to Title IV of
ERISA, and the Company has not incurred, and does not reasonably expect to
incur, any direct or indirect liability under or by operation of Title IV of
ERISA.
(c) With respect to the Company Benefit Plans, no event has occurred
and, to the knowledge of the Company, there exists no condition or set of
circumstances in connection with which the Company could be subject to any
Liability under the terms of such Company Benefit Plans, ERISA, the Code or any
other applicable law, except as could not reasonably be expected to have a
Company Material Adverse Effect.
(d) The Company is not a party to, and is not negotiating, any
collective bargaining or other labor union contract. There is no labor dispute,
strike or work stoppage against the Company pending or threatened in writing
which may interfere with the business activities of the Company. Neither the
Company nor, to the knowledge of the Company, its representatives or employees
has committed any unfair labor practices in connection with the operation of the
business of the Company, and there is no charge or complaint against the Company
by the National Labor Relations Board or any comparable state agency pending or
threatened.
(e) Except as set for on Schedule 3.16(e), neither the execution and
delivery of this Agreement nor the consummation of the transactions contemplated
hereunder will (A) result in any payment becoming due to any director or any
officer or employee of the
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Company or any of its affiliates under any Company Benefit Plan or otherwise;
(B) materially increase any benefits otherwise payable under any Company Benefit
Plan; or (C) result in any acceleration of the time of payment or vesting of any
material benefits.
3.17. Tax Matters. All Returns (as defined below) that are required to
have been filed by or with respect to the Company or the Company Subsidiaries
have been timely (taking into account all proper extensions) and properly filed
(and all such Returns are true and correct and complete in all material
respects). All taxes relating to such Returns or otherwise due in respect of the
Company or the Company Subsidiaries have been timely and properly paid (except
as expressly reserved and disclosed on the Financial Statements). Neither the
Company nor any of the Company Subsidiaries have received from any governmental
authority any written notice of proposed adjustment, deficiency or underpayment
of any Taxes, which notice has not been satisfied timely and properly by payment
or been withdrawn, and there are no claims that have been asserted or threatened
relating to such Taxes against the Company or any of the Company Subsidiaries.
No consent under Section 341(f) of the Code has been filed with respect to the
Company or the Company Subsidiaries. There are no Tax Liens on any assets of the
Company or any of the Company Subsidiaries. There are no proposed reassessments
of any property owned by the Company or any of the Company Subsidiaries or other
proposals that could increase the amount of any Tax to which the Company or any
of the Company Subsidiaries would be subject. Neither the Company nor any of the
Company Subsidiaries has been at any time a member of any partnership or joint
venture or the holder of a beneficial interest in any trust for any period for
which the statute of limitations for any Tax has not expired; and neither the
Company nor any of the Company Subsidiaries has been a member of any affiliated
group other than the affiliated groups of which the Company is the common
parent, or has filed a Return on a consolidated, combined or unitary basis with
any other corporation. The Financial Statements include adequate reserves, and
the Closing Balance Sheet will include adequate reserves, properly accrued and
disclosed in accordance with GAAP for Tax liability of the Company and the
Company Subsidiaries through the dates covered thereby. Except as set forth on
Schedule 3.17, no Returns relating to the Company or any of the Company
Subsidiaries have been reviewed or audited by any Taxing authority. Neither the
Company nor any of the Company Subsidiaries is doing business in, or engaged in
a trade or business in, any jurisdiction in which any applicable Return has not
been filed. There are no agreements for the extension of time for the assessment
of any Taxes of the Company or any of the Company Subsidiaries. No power of
attorney is currently in force that has been granted with respect to any matter
relating to Taxes that could affect the Company or any of the Company
Subsidiaries. Neither the Company nor any Company Subsidiaries is aware of any
plan, agreement or other circumstance that would prevent the Merger from
qualifying as a reorganization under Section 368(a) of the Code. As used herein,
"Returns" means any report, return, declaration or other filing required to be
supplied to any Taxing authority or jurisdiction with respect to Taxes,
including any amendments thereto, and "Taxes" means any and all taxes, fees,
levies, duties, tariffs, imposts and other charges of any kind (together with
any and all interest, penalties, additions to tax and additional amounts imposed
with respect thereto) imposed by any government or taxing authority, including,
without
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limitation: taxes or other charges on or with respect to income, franchises,
windfall or other profits, gross receipts, property, sales, use, capital stock,
payroll, employment, withholding (including, without limitation, employee
withholding), social security, medicare, workers' compensation, unemployment
compensation or net worth; taxes or other charges in the nature of excise, ad
valorem, stamp, transfer, value added or gains taxes; license, registration and
documentation fees; and customs duties, tariffs and similar charges.
3.18. Minute Books. To the Company's knowledge, the minute books of the
Company contain a materially complete and accurate record of all meetings of
directors and stockholders since the date of incorporation and all actions by
written consent.
3.19. Year 2000 Compliance. The Company's and the Company Subsidiaries'
computer systems, including the Service (the "Company's Systems") are Year 2000
Compliant. As used herein, "Year 2000 Compliant" means that the Company's
Systems will provide uninterrupted millennium functionality in that the
Company's Systems will record, store, process and present calendar dates falling
on or after January 1, 2000, in the same manner and with the same functionality
as the Company's Systems record, store, process and present calendar dates
falling on or before December 31, 1999.
3.20. Certain Interests. (a) Except as disclosed in Schedule 3.20(a),
as of the date hereof, the Company's knowledge no Company Shareholder and no
officer or director of the Company and no relative or spouse (or relative of
such spouse) of any such person owns, directly or indirectly, in whole or in
part, or has any other material interest in, any tangible or intangible property
which the Company or any Company Subsidiary uses or has used in the conduct of
the Business or otherwise.
(b) Except as disclosed in Schedule 3.20(b), the Company does not have
any Indebtedness or other material Liability or any other obligation of any
nature whatsoever owing from or to any Company Shareholder, any officer or
director of the Company or any Company Subsidiary or any relative or spouse of
any such person (or relative of any such spouse) or, if a Company Shareholder is
an entity, to an equity holder of such Company Shareholder or to any relative or
spouse (or relative of such spouse) of any of the foregoing.
3.21. Insurance. (a) Schedule 3.21(a) sets forth a true and complete
list naming each material insurance policy (the "Insurance Policies"), and
stating the amount and layers of coverage of such policy and whether such
Insurance Policy is "occurrence based" or "claims based", that is maintained, or
was maintained, by the Company or any Company Subsidiary at any time during the
three years preceding the date of this Agreement, the purpose of which was to
insure against material risk of loss to the Company or any Company Subsidiary.
(b) With respect to each such Insurance Policy, (i) the policy is
legal, valid, binding and enforceable in accordance with its terms and, except
for policies that have expired
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under their terms in the ordinary course, is in full force and effect; (ii)
except as listed in Schedule 3.21(b), neither the Company nor any Company
Subsidiary is in material breach or default, and no event has occurred which,
with notice or the lapse of time, would constitute such a material breach or
default and permit termination or modification under the policy; and (iii)
except as listed in Schedule 3.21(b), no party to the policy has repudiated, or
given written notice to the Company or any Company Subsidiary of an intent to
repudiate, any material provision thereof.
3.22. Brokers and Finders. Neither the Principal Shareholders, the
Company, nor any of the officers, directors or employees of the Company has
employed or otherwise incurred in any manner any liability for any brokerage
fees, agents' commissions or finder's fees concerning the transactions hereby
with the exception of Houlihan Lokey Howard Zukin Inc. and U.S. Bancorp Libra.
3.23. Proxy Statement; Registration Statement. (a) None of the
necessary proxy or disclosure statements required by applicable law to be
disseminated to the Company Shareholders in connection with the Merger or any
amendments or supplements thereto (the "Proxy Statement") shall, at the date the
Proxy Statement (or any amendment or supplement thereto) is first mailed to the
Company Shareholders or at the time of the Stockholders' Meeting, contain any
statement which, at the time and in light of the circumstances under which it
was made, is false or misleading with respect to any material fact, or which
omits to state any material fact necessary in order to make the statements
therein not false or misleading or necessary to correct any statement in any
earlier communication with respect to the solicitation of proxies for the
Stockholders' Meeting which shall have become false or misleading. The Proxy
Statement shall comply in all material respects as to form with the requirements
of applicable law.
(b) None of the information supplied by the Company for inclusion in
the Registration Statement on Form S-4 (the "Registration Statement") shall, at
the times the Registration Statement or any amendments or supplements thereto
are filed with the SEC or are first published, sent or given to the Company
Shareholders, as the case may be, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading. Notwithstanding the foregoing, the
Company makes no representation or warranty with respect to any information
supplied by Parent or any of Parent's representatives for inclusion in the
forgoing documents.
3.24. Customers. Except as set forth in Schedule 3.24, during the
twelve months prior to the date hereof, no customer of the Company or any
Company Subsidiary which accounted for in excess of $15,000 of the revenues of
the Company and the Company Subsidiaries during such twelve months or $1,500 of
such revenues during any one month within
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such period, has canceled or otherwise terminated its relationship with the
Company or any Company Subsidiary.
3.25. Sales Personnel. As of the date hereof, the Company employs over
60 employees primarily engaged in sales.
3.26. Condition and Operation of the Assets. Except as set forth on
Schedule 3.26, except as would not have a Company Material Adverse Effect, all
assets owned, leased or shared by the Company or the Company Subsidiaries which
are material to the business of the Company and the Company Subsidiaries (the
"Company Assets"), are in compliance with all applicable build-out requirements,
are in good operating condition and repair, ordinary wear and tear excepted, and
are suitable, adequate and fit for the uses for which they are intended and are
being used, as the case may be. Except as would not have a Company Material
Adverse Effect, the Company Assets meet the technical standards, if any, of the
FCC and do not violate any applicable Laws, engineering standards or building,
fire, zoning, health and safety or other Laws.
3.27. Knowledge. For purposes of this Agreement, the term "Company's
knowledge" shall mean the actual knowledge of Brian Matthews, Rich Phillips,
Alan Schrager, Blake Ashby, Tom Hesterman, Sue Butler, Michael Torrence, Tony
Hartke and John Alden, after due inquiry.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
PARENT AND THE MERGER SUBSIDIARY
As an inducement to the Company to enter into this Agreement, Parent
and the Merger Subsidiary jointly and severally represent and warrant to the
Company as follows:
4.1. Parent's and Merger Subsidiary's Organization and Good Standing.
Each of Parent and the Merger Subsidiary is a corporation duly incorporated,
validly existing and in good standing under the laws of the States of Nevada and
Delaware, respectively, and has all corporate power and authority to own, lease
and operate its properties and to carry on its business as now being conducted.
Each of Parent and the Merger Subsidiary is duly qualified to do business and in
good standing in each jurisdiction where the character of property owned or
leased by it or the nature of its activities makes such qualification necessary,
except for those jurisdictions where the failure to be so qualified would not
materially prevent or delay consummation of the transactions contemplated by
this Agreement.
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4.2. Power and Authority; Execution and Delivery. Each of Parent and
the Merger Subsidiary has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby have been duly approved and authorized by
all requisite corporate action of Parent and the Merger Subsidiary and such
approval has not been modified or rescinded. Except for the filing of a
certificate of merger in accordance with the Delaware GCL, no further corporate
actions or approvals on the part of Parent or the Merger Subsidiary are required
under applicable law for the consummation of the Merger. This Agreement has been
duly executed and delivered by Parent and the Merger Subsidiary and constitutes
the legal, valid and binding obligation of Parent and the Merger Subsidiary,
enforceable against it in accordance with its terms subject to the effect of any
applicable bankruptcy insolvency (including, without limitation, all laws
relating to fraudulent transfers), reorganization, moratorium or similar laws
affecting creditors rights generally and subject to the effect of general
principles of equity (regardless of whether considered in a proceeding at law or
in equity. True and correct copies of the Certificate of Incorporation and
bylaws of each of Parent and the Merger Subsidiary, each as in effect on the
date hereof, have been made available by Parent to the Company.
4.3. Governmental Approvals and Filings. Except for the filings
required under the HSR Act, the filing of a certificate of merger in accordance
with the Delaware GCL, and the filing of a Registration Statement on Form S-4
pursuant to the Securities Act of 1933, as amended (the "Securities Act") with
the Securities and Exchange Commission (the "SEC"), no approval, authorization,
consent, license, clearance or order of, declaration or notification to, or
filing, registration or compliance with, any governmental or regulatory
authority, is required in order to permit Parent or the Merger Subsidiary to
enter into this Agreement or to consummate the transactions contemplated herein.
4.4. No Conflict. Neither the execution, delivery and performance of
this Agreement by Parent and the Merger Subsidiary, nor the consummation by
Parent and the Merger Subsidiary of the transactions contemplated hereby will
(i) conflict with, or result in a breach of any of the terms, conditions or
provisions of the Certificates of Incorporation or By-laws of Parent and the
Merger Subsidiary, (ii) conflict with, result in a breach or violation of, give
rise to a default under or result in the acceleration of performance under any
mortgage, lease, agreement, note, bond, indenture, guarantees or any Law or
Governmental Order to which Parent or the Merger Subsidiary may be subject,
which conflict, breach, default, violation or acceleration would not materially
prevent or delay consummation of the transactions contemplated by this
Agreement, or (iii) give rise to an imposition of any Lien, charge, security
interest or encumbrance of any nature whatsoever upon any of the assets of
Parent or the Merger Subsidiary.
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4.5. Merger Consideration. When issued, the shares of Parent Common
Stock to be issued in the Merger will be duly authorized, validly issued,
fully-paid and nonassessable and free and clear of all Liens and preemptive
rights. The certificates representing such shares will be in due and proper
form.
4.6 Capitalization. The authorized capital stock of Parent consists of
60,000,000 shares of Parent Common Stock and 50,000,000 shares of preferred
stock, par value $.001 per share, ("Parent Preferred Stock"). As of February 29,
2000, 29,747,936 shares of Parent Common Stock are issued and outstanding, all
of which are validly issued, fully paid and nonassessable, (b) 9,140 Shares are
held in the treasury of Parent, and (d) 3,665,332 Shares are reserved for future
issuance pursuant to outstanding employee stock options or stock incentive
rights granted pursuant to the Parent Stock Option Plans. As of the date hereof,
5,277,779 shares of Series B Convertible Preferred Stock, 1,250,000 shares of
Series C Convertible Preferred Stock and 4,140,000 shares of Series D
Convertible Preferred Stock are issued and outstanding. Except as set forth on
Schedule 4.6, there are no options, warrants or other rights, agreements,
arrangements or commitments of any character relating to the issued or unissued
capital stock of Parent or obligating Parent to issue or sell any shares of
capital stock of, or other equity interests in, Parent. All Shares subject to
issuance as aforesaid, upon issuance on the terms and conditions specified in
the instruments pursuant to which they are issuable, will be duly authorized,
validly issued, fully paid and nonassessable. There are no outstanding
contractual obligations of Parent to repurchase, redeem or otherwise acquire any
Shares or to provide funds to, or make any investment (in the form of a loan,
capital contribution or otherwise) in, any other person.
4.7. Reports and Financial Statements. (a) Parent has made available to
the Company true and complete copies of (i) its Annual Report on Form 10-K, as
amended, for the year ended December 31, 1999 as filed with the SEC, (ii) its
proxy statements relating to all of the meetings of stockholders (whether annual
or special) of Parent since December 31, 1998, as filed with the SEC, and (iii)
all other reports, statement and registration statements and amendments thereto
(including, without limitation, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K, as amended) filed by Parent since December 31, 1998
(collectively, the "Parent Securities Filings"). As of their respective dates,
or as of the date of the last amendment thereof, if amended after filing, none
of the Parent Securities Filings (including all schedules thereto and disclosure
documents incorporated by reference therein), contained or as to Parent
Securities Filings subsequent to the date hereof, will contain any untrue
statement of a material fact or omitted or, as to the Parent Securities Filings
subsequent to the date hereof, will omit to state a material fact required to be
stated therein or necessary to make the statements therein, in lights of the
circumstances under which they were made, not misleading. Each of the Parent
Securities Filings at the time of filing or as of the date of the last amendment
thereof, if amended after filing, complied or, as to the Parent Securities
Filings subsequent to the date hereof, will comply in all material respects with
the Securities Exchange Act or the Securities Act, as applicable. Any reports,
statements and registration statements and amendments thereof (including,
without limitation, Reports on Form 10-K, Quarterly Reports on Form 10-Q and
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Current Reports on Form 8-K, as amended) filed by Parent with the SEC after the
date hereof shall be provided to the Company on the date of such filing.
(b) The audited financial statements and unaudited interim financial
statements included in the Parent Securities Filings (the "Parent Financial
Statements"), have been prepared in accordance with GAAP applied on a consistent
basis (except as may be indicated therein or in the notes thereto) and fairly
present the financial position of Parent as of the date thereof and the results
of operations and changes in cash flow of Parent for the periods then ended,
subject in the case of unaudited interim financial statements, to normal
year-end adjustments which are neither individually nor in the aggregate
expected to be material.
4.8. No Undisclosed Liabilities. Except as set forth on Schedule 4.8,
there are no Liabilities of Parent, other than Liabilities (a) reflected or
reserved against on Parent's December 31, 1999 balance sheet or described in the
notes thereto, or (b) incurred since December 31, 1999 in the ordinary course of
Parent's business, consistent with past practice that individually or in the
aggregate have not had and are not reasonably likely to have a Parent Material
Adverse Effect. As used herein, a "Parent Material Adverse Effect" means any
event, circumstance, change in, or effect on, the business of Parent that, when
taken together with all other events, circumstances, changes and effects
occurring after the date hereof that do not individually have a Parent Material
Adverse Effect and all other circumstances that would, but for the fact that
they do not individually have a Parent Material Adverse Effect, constitute a
breach of any representation or warranty made by Parent in this Agreement is, or
would reasonably be expected to be, materially adverse, taken as a whole, to the
business, operations, financial condition, results of operations or prospects of
the Parent's business; provided, however, that "Parent Material Adverse Effect"
shall not included events, circumstances, changes or effects (including legal
and regulatory changes) that generally affect the industries in which Parent
operates.
4.9. Absence of Certain Changes or Events. Since December 31, 1999,
except as set forth on Schedule 4.9 there has not been any other event or
condition of any character which would reasonably be expected, individually or
in the aggregate, to have a Parent Material Adverse Effect.
4.10. Compliance with Laws. Except as would not reasonably be expected
to have a Parent Material Adverse Effect, Parent has conducted its business in
accordance with all Laws and Governmental Orders applicable to Parent or any of
Parent's assets or business, and Parent is not in violation of any such Law or
Governmental Order.
4.11. Litigation. Except as set forth on Schedule 4.11, there are no
Actions pending which would have a Parent Material Adverse Effect or, to
Parent's knowledge, threatened by or against Parent (or by or against any
shareholder or any affiliate thereof and relating to the business of Parent) or
affecting any of Parent's assets, or that would reasonably be
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likely to affect the legality, validity or enforceability of this Agreement or
the transactions contemplated hereby.
4.12. Ownership of Merger Subsidiary. All of the authorized capital
stock of the Merger Subsidiary is owned beneficially and of record by Parent.
4.13. Subsidiaries. Parent does not own or control or have the right to
own or control, directly or indirectly, any interest in any other corporation,
association or other business entity other than the Merger Subsidiary. Parent is
not a member of (nor is any part of the Company's business conducted through)
any partnership or limited liability company and it is not a participant in any
joint venture or similar arrangement.
4.14. Articles of Incorporation and Bylaws. (a) Each of Parent and the
Merger Subsidiary have delivered to the Company copies of its Articles of
Incorporation and all amendments thereto, which copies are complete and correct.
Neither Parent nor the Merger Subsidiary is in default under, or in violation
of, any provisions of its Articles of Incorporation.
(b) Each of Parent and the Merger Subsidiary have delivered to the
Company copies of its By-laws and all amendments thereto, which copies are
complete and correct. Neither Parent nor the Merger Subsidiary is in default
under, or in violation of, any provision of its bylaws.
4.15. No Prior Activities. The Merger Subsidiary has not incurred any
liabilities or obligations, except those incurred in connection with its
incorporation and with the consummation of this Agreement and the transactions
contemplated hereby. The Merger Subsidiary has not engaged in any business or
activities of any type or kind whatever, or entered into any agreements or
arrangements with any person or entity, and is not subject to or bound by any
obligation or undertaking which is not contemplated by this Agreement or
incurred in connection with its incorporation.
4.16. Brokers and Finders. Neither Parent, the Merger Subsidiary, nor
any of their officers, directors or employees have employed or otherwise
incurred in any manner any liability for any brokerage fees, agents' commissions
or finder's fees concerning the transactions hereby, with the exception of Bear
Stearns & Co. Inc.
4.17. Permits; Compliance. Parent is in possession of all Permits,
except where the failure to have, or the suspension or cancellation of, any of
the Permits would not prevent or materially delay consummation of the Merger or
otherwise prevent or materially delay Parent from performing its obligations
under this Agreement and would not, individually or in the aggregate, have a
Parent Material Adverse Effect. No suspension or cancellation of any of the
Permits is pending or, to the knowledge of Parent, threatened, except where the
failure to have, or the suspension or cancellation of, any of the Permits would
not prevent or materially delay
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consummation of the Merger or otherwise prevent or materially delay Parent from
performing its obligations under this Agreement and would not have a Parent
Material Adverse Effect. Parent is not in conflict with, or in default, breach
or violation of any note, bond, mortgage, indenture, contract, agreement, lease,
license, Permit, franchise or other instrument or obligation to which Parent is
a party or by which Parent or any property or asset of Parent is bound, except
for any such conflicts, defaults, breaches or violations that would not prevent
or materially delay consummation of the Merger or otherwise prevent or
materially delay Parent from performing its obligations under this Agreement and
would not, individually or in the aggregate, have a Parent Material Adverse
Effect.
4.18. Taxes. Parent has not taken any past action which would prevent
treatment of the Merger as a tax-free reorganization within the meaning of
Section 368 of the Code and the Treasury resolutions thereunder.
4.19. Registration Statement; Proxy Statement. (a) The Registration
Statement shall not, at the time the Registration Statement is filed with the
SEC or is first published, sent or given to the Company Shareholders, as the
case may be, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements made therein, in the light of the circumstances under which they
were made, not misleading. The Registration Statement shall comply in all
material respects as to form with the requirements of the Securities Act and the
rules and regulations thereunder.
(b) The information supplied by Parent for inclusion in the Proxy
Statement shall not, at the date the Proxy Statement (or any amendment or
supplement thereto) is first mailed to stockholders of the Company, at the time
of the Shareholders' Meeting or at the Effective Time, contain any untrue
statement of a material fact, or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not false or misleading, or
necessary to correct any statement in any earlier communication with respect to
the solicitation of proxies for the Shareholders' Meeting which shall have
become false or misleading. Notwithstanding the foregoing, Parent makes no
representation or warranty with respect to any information supplied by the
Company or any of its representatives for inclusion in any of the foregoing
documents or the Registration Statement.
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ARTICLE V
COVENANTS OF THE COMPANY
The Company covenants and agrees that:
5.1. Regular Course of Business; Restricted Activities and
Transactions. Except as otherwise consented to in writing by Parent, prior to
the Effective Time, each of the Company and the Company Subsidiaries will carry
on its businesses only in the ordinary course and in a manner consistent with
past practices and each of the Company and the Company Subsidiaries will use all
reasonable efforts to preserve its present business organization intact and keep
available the services of its present executive officers. By way of
amplification and not limitation, neither the Company nor any Company Subsidiary
will, between the date hereof and the Effective Time, directly or indirectly, or
agree to:
(a) take any of the actions specified in Sections 3.8(a), (c), (d),
(other than issuances of Company Common Stock pursuant to Preferred Stock
or Company Stock Options outstanding on the date hereof), (e), (f) (other
than sales of assets in connection with financing contemplated by Section
6.9), (g) (j), (k), or (l);
(b) hire or otherwise employ any individual whose annual cash
compensation would exceed $100,000; and
(c) cause any Lien to be imposed on any assets or properties (whether
tangible or intangible) of the Company or any Company Subsidiary except any
Lien securing Indebtedness incurred in accordance with Section 5.1(d);
(d) incur any Indebtedness; other than Indebtedness incurred pursuant
to Section 6.9.
5.2. Access to Books, Records and Other Information. Each of the
Company and the Company Subsidiaries will afford to Parent and its accountants,
attorneys and agents, as reasonably requested by Parent, information and access,
during normal business hours, to the offices, properties, books and records of
the Company and the Company Subsidiaries and to those principal officers,
directors, employees, agents, accountants and counsel of the Company and the
Company Subsidiaries who have knowledge of the Company and the Company
Subsidiaries or the Business.
5.3. Notice of Developments. Prior to the Effective Time, the Company
shall promptly notify Parent in writing of (a) all events, circumstances, facts
and occurrences arising
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subsequent to the date of this Agreement which could result in any breach of a
representation or warranty or covenant of the Company in this Agreement or which
could have the effect of making any representation or warranty of the Company in
this Agreement untrue or incorrect in any material respect and (b) all other
material developments affecting the Company's assets, Liabilities, business,
financial condition, operations, results of operations, customer or supplier
relations, employee relations or prospects of the Company and the Company
Subsidiaries or the Business.
5.4. No Solicitation or Negotiation. The Company agrees that between
the date of this Agreement and the earlier of (i) the Effective Time and (ii)
the termination of this Agreement, none of the Company or any of its affiliates,
officers, directors, representatives or agents will (a) solicit, initiate,
consider, encourage or accept any other proposals or offers from any person or
entity (A) relating to any acquisition or purchase of all or any portion of the
capital stock or a material portion of the assets of the Company or any Company
Subsidiary, (B) to enter into any business combination with the Company or any
Company Subsidiary or (C) to enter into any other extraordinary business
transaction involving or otherwise relating to the Company or any Company
Subsidiary or (b) participate in any discussions, conversations, negotiations or
other communications regarding, or furnish to any other person or entity any
information with respect to, or otherwise cooperate in any way, assist or
participate in, facilitate or encourage, any effort or attempt by any other
person or entity to seek to do any of the foregoing. The Company immediately
shall cease and cause to be terminated all existing discussions, conversations,
negotiations and other communications with any persons or entities conducted
heretofore with respect to any of the foregoing. The Company shall notify Parent
promptly if any such proposal or offer, or any inquiry or other contact with any
person or entity with respect thereto, is made and shall, in any such notice to
Parent, indicate in reasonable detail the identity of the person or entity
making such proposal, offer, inquiry or contact and the terms and conditions of
such proposal, offer, inquiry or other contact. The Company agrees not to,
without the prior written consent of Parent, release any person or entity from,
or waive any provision of, any confidentiality or standstill agreement to which
the Company is a party. Pursuant to the terms of any existing confidentiality
agreement to which any shareholder or the Company is a party, the Company shall
cause the return or destruction of any confidential or proprietary information
in the possession of any third party.
5.5. Preservation of Tax-Free Merger. The Company will not, nor shall
it permit any of its shareholders or affiliates to, without the prior written
waiver by Parent, knowingly take any action intended or reasonably likely to
prevent or impede the Merger from qualifying as a tax-free reorganization within
the meaning of Section 368(a) of the Code.
5.6. Shareholders' Meeting. The Company, acting through the Board,
shall, in accordance with applicable law and the Company's Certificate of
Incorporation and By-laws, (i) duly call, give notice of, convene and hold a
special meeting of the Company Shareholders as
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promptly as practicable following the date hereof for the purpose of considering
and taking action on this Agreement and the Merger (the "Shareholders' Meeting")
and (ii) use its reasonable best efforts to obtain such approval and adoption.
5.7. Proxy Statement. The Company shall give Parent and its counsel the
opportunity to review the Proxy Statement, including all amendments and
supplements thereto, prior to its being sent to the Company Shareholders. Each
of the Company and Parent agrees to use its reasonable best efforts, after
consultation with the other parties hereto, to cause the Proxy Statement and all
required amendments and supplements thereto to be mailed to the Company
Shareholders entitled to vote at the Shareholders' Meeting at the earliest
practicable time.
5.8. Opinions of Counsel. The Company will use all reasonable efforts
and will act in good faith to ensure that the opinions specified in Sections 8.3
and 9.3 are delivered, including, without limitation the delivery by the Company
of representation letters or certificates as to such matters as the counsels for
Parent and the Company may reasonably request in order to render such opinions.
ARTICLE VI
COVENANTS OF PARENT
6.1. Directors' and Officers' Indemnification and Insurance. (a) The
By-laws of the Surviving Corporation shall contain provisions no less favorable
with respect to indemnification than are set forth in Article VII, Section 7.1
of the Amended and Restated By-laws of the Company, which provisions shall not
be amended, repealed or otherwise modified for a period of six years from the
Effective Time in any manner that would affect adversely the rights thereunder
of individuals who, at or prior to the Effective Time, were directors, officers,
employees, fiduciaries or agents of the Company, unless such modification shall
be required by law.
(b) In the event the Surviving Corporation or any of its successors or
assigns (i) consolidates with or merges into any other person and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger, or (ii) transfers or conveys all or substantially all of its properties
and assets to any person, then, and in each such case, to the extent necessary,
proper provision shall be made so that the successors and assigns of the
Surviving Corporation assume the obligations set forth in this Section 6.1.
(c) The Surviving Corporation shall use its best efforts to maintain in
effect for six years from the Effective Time, if available, the current
directors' and officers' liability insurance policies maintained by the Company
(provided that the Surviving Corporation may
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substitute therefor policies of at least the same coverage containing terms and
conditions which are not less favorable) with respect to matters occurring prior
to the Effective Time; provided, however, that in no event shall the Surviving
Corporation be required to expend pursuant to this section 6.1(c) more than an
amount per year equal to 200% of current annual premiums paid by the Company for
such insurance (which premiums the Company represents and warrants to be $43,000
in the aggregate).
(d) The provisions of this Section 6.1 are intended to be for the
benefit of and shall be enforceable by, the directors and officers of the
Company and his or her heirs and representatives.
6.2. Preservation of Tax-Free Merger. Parent will not, nor shall it
permit any of its subsidiaries or affiliates to, without the prior written
waiver of the Shareholder Representative, knowingly take any action intended or
reasonably likely to prevent or impede the Merger from qualifying as a tax-free
reorganization within the meaning of Section 368(a) of the Code.
6.3. Certain Employee Matters. Parent covenants to the Company that
Parent will provide after the Effective Time to continuing employees of the
Company, including, without limitation, those who become directors or officers
of the Surviving Corporation (the "Transferred Employees"), severance
arrangements, and employee benefit programs in the aggregate, that are no less
favorable to the Transferred Employees than those being provided to Parent's
similarly situated employees on the date of this Agreement. Parent shall, or
shall cause the Company to, grant service credit to the Transferred Employees
with respect to service with the Company prior to the Effective Time for
purposes of eligibility to participate and vesting under any employee benefit
plans of Parent that may be extended to the Transferred Employees, but only to
the extent that such prior service was recognized under the Company Benefit
Plans from and after the Effective Time, with respect to any medical or dental
plan of Parent in which continuing employees of the Company become eligible to
participate, Parent shall waive any pre- existing condition exclusions and
actively-at-work requirements (provided, however, that not such waiver shall
apply to a pre-existing condition of any employee of the Company who was, as of
the Effective Time, excluded from participation in a Company Benefit Plan by
virtue of such pre-existing condition) and provide that any covered expenses
incurred on or before the Effective Time by an employee or any employee's
covered dependents shall be taken into account for purposes of satisfying
applicable deductible, coinsurance and maximum out-of-pocket provisions after
the Effective Time to the same extent as such expenses are taken into account
for the benefit of similarity situated employees of Parent.
6.4. Opinions of Counsel. Parent will use all reasonable efforts and
will act in good faith to ensure that the opinions specified
in Sections 8.4 and 9.4 are delivered, including, without limitation, the
delivery by Parent of representation letters or certificates as to such
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matters as the counsels for Parent and the Company may reasonably request in
order to render such opinions.
6.5. Registration Statement. Parent shall prepare and file with the SEC
a Registration Statement on Form S-4 connection with the registration under the
Securities Act of the shares of Parent Common Stock to be issued to the Company
Shareholders pursuant to the Merger. Parent shall use its reasonable best
efforts to cause the Registration Statement to become effective as promptly as
practicable, and, prior to the effectiveness of the Registration Statement,
Parent shall use its reasonable best efforts to take all or any action required
under any applicable federal or state securities Laws in connection with the
issuance of shares of Parent Common Stock pursuant to the Merger.
6.6. Stock Exchange Listing. Parent shall as promptly as reasonably
practicable prepare and submit to the NASDAQ a listing application covering the
shares of Parent Common Stock to be issued in the Merger and shall use its
reasonable best efforts to cause such shares to be approved for listing on the
NASDAQ prior to the Effective Time.
6.7. Access to Information. Parent will afford to the Company and its
accountants, attorneys and agents, as reasonably requested by the Company,
information regarding and access to, during normal business hours, information
relating to the financial performance of the Company.
6.8. Notice of Developments. Prior to the Effective Time, Parent shall
promptly notify the Company in writing of all events, circumstances, facts and
occurrences arising subsequent to the date of this Agreement (a) which could
result in any breach of a representation or warranty or covenant of Parent in
this Agreement or which could have the effect of making any representation or
warranty of Parent in this Agreement untrue or incorrect in any material respect
and (b) all other material developments affecting Parent's assets, Liabilities,
business, financial condition, operations, results of operations, customer or
supplier relations, employee relations or prospects of Parent.
6.9. Credit Facility. Parent will, during the period prior to the
Effective Time, make available to the Company up to $15,000,000 of funding for
the Company's operations in the ordinary course of business consistent with past
practice and capital expenditures permitted under this Agreement and such other
uses as are provided in the Senior Note or other documents relating to such
funding. Funding in an amount of $7,000,000 will be provided pursuant to a
senior note having the terms set forth on Annex 6.9 within 10 business days of
the date hereof. The advance of such amounts to the Company by Parent is
conditioned on the issuance of one share of Company Common Stock to Parent. The
remaining funds will be advanced upon the purchase of Assets from the Company by
Parent on terms to be agreed by the parties or pursuant to other means that may
be agreed by the Parties.
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6.10. Current Public Information. Parent shall cause the requirements
of Rule 144(c) under the Securities Act to be met with respect to itself for so
long as those requirements are required to be met to enable sales of Parent
Common Stock by Company Shareholders under Rule 145(c) of the Exchange Act.
ARTICLE VII
MUTUAL COVENANTS
7.1. Payment of Expenses. Each party to this Agreement shall be
responsible for its own costs and expenses incurred in connection with the
transactions contemplated by this Agreement.
7.2. Public Announcements. No party to this Agreement shall issue any
reports, public statements or releases pertaining to this Agreement or any
transaction contemplated hereby without the consent of the other parties hereto.
7.3. Further Action. (a) Upon the terms and subject to the conditions
hereof, each of the parties hereto shall (i) make promptly its respective
filings, and thereafter make any other required submissions, under the HSR Act
with respect to the Merger and (ii) use its reasonable efforts to take, or cause
to be taken, all appropriate action, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the Merger, including, without limitation, using
its reasonable efforts to obtain all Permits, consents, approvals,
authorizations, qualifications and orders of Governmental Authorities and
parties to contracts with the Company as are necessary for the consummation of
the Merger and to fulfill the conditions to the Merger; provided, however, that
neither Parent nor the Merger Subsidiary will be required by this Section 7.3 to
take any action, including entering into any consent decree, hold separate
orders or other arrangements, that (A) requires the divestiture of any assets of
any of Parent, Company or any of their respective subsidiaries or (B) limits
Parent's freedom of action with respect to, or its ability to retain, the
Company, any Company Subsidiary or any portion thereof or any of Parent's or its
affiliates' other assets or businesses. In case, at any time after the Effective
Time, any further action is necessary or desirable to carry out the purposes of
this Agreement, the proper officers and directors of each party to this
Agreement shall use their reasonable best efforts to take all such action.
(b) Each of the parties hereto agrees to cooperate and use its
reasonable best efforts to vigorously contest and resist any Action, including
administrative or judicial Action, and to have vacated, lifted, reversed or
overturned any decree, judgment, injunction or other order (whether temporary,
preliminary or permanent) that is in effect and that restricts, prevents
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or prohibits consummation of the Merger or the other transactions contemplated
hereby, including, without limitation, by vigorously pursuing all available
avenues of administrative and judicial appeal.
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF PARENT
The obligation of Parent to consummate the transactions contemplated by
this Agreement shall be subject to the fulfillment of the following conditions:
8.1. Representations and Warranties True. The representations and
warranties of the Company contained in this Agreement and of the Principal
Shareholders contained in the Shareholders Agreement shall have been true and
correct when made and shall be true and correct in all material respects as of
the Effective Time (unless such representations and warranties are qualified as
to materiality or by Material Adverse Effect, in which case, such
representations and warranties shall have been true and correct in all respects
when made and shall be true and correct in all respects as of the Closing), with
the same force and effect as if made as of the Closing, other than the
representations and warranties made as of another date (which shall be true and
correct as of such other date).
8.2. Performance of Covenants. The Company and the Principal
Shareholders shall have performed or complied in all material respects with all
terms, covenants and agreements required to be performed by them or complied
with under this Agreement or under the Shareholders Agreement prior to the
Closing.
8.3. Opinion of Counsel. The Company shall have delivered to Parent an
opinion, dated the Effective Time and addressed to Parent, of Milbank, Tweed,
Hadley & McCloy in the form attached as Exhibit 8.3.
8.4. Tax Opinion. Shearman & Sterling, counsel to Parent, shall have
delivered to Parent an opinion, dated as of the date on which the Effective Time
occurs and addressed to Parent, of Shearman & Sterling, in form and substance
reasonably satisfactory to Parent to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion which are consistent
with the state of facts existing at the Effective Time, (i) the Merger will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code, and (ii) each of Parent, the Company and the
Merger Subsidiary will be a party to a reorganization within the meaning of
Section 368(b) of the Code. (In rendering the opinion described in this Section
8.4, Shearman & Sterling will rely on customary assumptions
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and on representations, assumptions and facts provided by Parent and the
Company, including, without limitation, the standard representations set forth
in Revenue Procedure 86-42, 1986-2 C.B. 722).
8.5. HSR; Other Approvals and Consents. The waiting period under the
HSR Act shall have expired or been terminated, and there shall have been
obtained, each in form and substance satisfactory to Parent, the approvals and
authorizations of governmental and regulatory authorities referred to in
Sections 3.9 and 4.3.
8.6. No Governmental or Other Proceeding or Litigation. No order of any
court or administrative agency shall be in effect which restrains or prohibits
any transaction contemplated hereby or which would limit or otherwise affect in
any material respect the Merger or Parent's ownership of the Company; and no
suit, action, or proceeding by any governmental body shall be pending against
Parent, the Merger Subsidiary, any Principal Shareholder or the Company, which
challenges the validity or legality, or seeks to restrain the consummation, of
any transaction contemplated hereby or which seeks to limit or otherwise affect
the Merger or Parent's ownership of the Company.
8.7. Certificate of the Company. The Company shall have furnished
Parent with a certificate signed by a principal executive officer of the Company
to the effect that, with respect to the Company, the conditions set forth in
Sections 8.1 and 8.2 have been satisfied.
8.8. No Material Adverse Effect. No event or occurrence shall have
occurred that has had or is reasonably likely, individually or in the aggregate,
to have a Company Material Adverse Effect.
8.9. Certificate of Merger. The Company shall have executed and
delivered to Parent and the Merger Subsidiary the Certificate of Merger to be
filed with the Secretary of State of the State of Delaware in connection with
the Merger.
8.10. FIRPTA. The Company shall have certified to Parent (in a form
reasonably satisfactory to Parent) that the Company is not, and has not been for
the relevant period specified in Section 897 of the Code, a United States real
property holding corporation within the meaning of Section 897 of the Code.
8.11. NASDAQ Listing. The shares of Parent Common Stock to be issued in
the Merger shall have been approved for listing on the NASDAQ.
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ARTICLE IX
CONDITIONS TO OBLIGATIONS OF THE COMPANY
The obligations of the Company to consummate the transactions
contemplated by this Agreement shall be subject to the fulfillment of the
following conditions:
9.1. Representations and Warranties True. The representations and
warranties of Parent and Merger Subsidiary contained in this Agreement shall
have been true and correct in all material respects when made and shall be true
and correct in all material respects as of the Effective Time (unless such
representations and warranties are qualified as to materiality, in which case,
such representations and warranties shall have been true and correct in all
respects when made and shall be true and correct in all respects as of the
Effective Time), with the same force and effect as if made as of the Effective
Time, other than the representations and warranties as are made as of another
date (which shall be true and correct as of such other date).
9.2. Performance of Covenants. Each of Parent and the Merger Subsidiary
shall have performed or complied with in all material respects all terms,
covenants and agreements required to be performed by it or complied with under
this Agreement prior to the Effective Time.
9.3. Tax Opinion. Milbank, Tweed, Hadley & McCloy shall have delivered
to the Company and the Principal Shareholders an opinion, dated as of the date
on which the Effective Time occurs and addressed to the Company, in form and
substance reasonably satisfactory to the Company to the effect that, on the
basis of facts, representations and assumptions set forth in such opinion which
are consistent with the state of facts existing at the Effective Time, (i) the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code, and (ii) each of Parent, the
Company and the Merger Subsidiary will be a party to a reorganization within the
meaning of Section 368(b) of the Code. (In rendering the opinion described in
this Section 10.3, Milbank, Tweed, Hadley & McCloy will rely on customary
assumptions and on representations facts provided by Parent and the Company,
including, without limitation, the standard representations set forth in Revenue
Procedure 86-42, 1986-2 C.B. 722).
9.4. Other Opinions. Parent's counsel shall have delivered to the
Company an opinion, dated as of the date on which the Effective Time occurs and
addressed to the Company, of Parent's counsel in the form attached as Exhibit
9.4.
9.5. HSR; Other Approvals and Consents. The waiting period under the
HSR Act shall have expired or been terminated, and the approvals and
authorizations of governmental and regulatory authorities referred to in
Sections 3.9 and 4.3 shall have been obtained.
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9.6. No Governmental or Other Proceeding or Litigation. No order of any
court or administrative agency shall be in effect which restrains or prohibits
any transaction contemplated hereby or which would limit or otherwise affect in
any respect Parent's ownership of the Company; and no suit, action, or
proceeding by any governmental body shall be pending against Parent, the Merger
Subsidiary, the Company or any Principal Shareholder, which challenges the
validity or legality, or seeks to restrain the consummation, of any transaction
contemplated hereby or which seeks to limit or otherwise affect the Merger.
9.7. Certificate of Parent and the Merger Subsidiary. Parent shall have
furnished the Company with a Certificate of Parent and the Merger Subsidiary
signed by a principal executive officer to the effect that the conditions set
forth in Sections 9.1 and 9.2 have been satisfied.
9.8. Certificate of Merger. Parent and the Merger Subsidiary shall have
executed and delivered to the Company the certificate of merger to be filed with
the Secretary of State of the State of Delaware in connection with the Merger.
9.9. No Material Adverse Effect. No event or occurrence shall have
occurred that has had or is reasonably likely, individually or in the aggregate,
to have a Parent Material Adverse Effect.
9.10. Registration Statement. The Registration Statement shall have
been declared effective, and no stop order suspending the effectiveness of the
Registration Statement shall be in effect and no proceedings for such purpose
shall be pending before or threatened by the SEC.
9.11. NASDAQ Listing. The shares of Parent Common Stock to be issued in
the Merger shall have been approved for listing on the NASDAQ.
ARTICLE X
SURVIVAL AND INDEMNIFICATION
10.1. Survival of Representations and Warranties. The representations
and warranties contained in this Agreement and all statements contained in this
Agreement, shall survive the Effective Time until April 30, 2001; provided,
however, that the representations and warranties made in Sections 3.1, 3.2, 3.3,
3.5, 4.1, 4.2, 4.5 and 4.6 shall survive indefinitely. Neither the period of
survival nor the liability of a party hereto with respect to such party's
representations and warranties shall be reduced by any investigation made at any
time by or on behalf of any other party hereto. If written notice of a claim has
been given prior to the
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expiration of the applicable representations and warranties, then the relevant
representations and warranties shall survive as to such claim, until such claim
has been finally resolved.
10.2. Indemnification by the Company Shareholders. Parent and its
affiliates (including the Company after the Closing), officers, directors,
employees, agents, successors and assigns (each, a "Parent Indemnified Party")
shall be indemnified and held harmless by the Company before the Effective Time
and, severally but not jointly by the Company Shareholders who shall have
expressly agreed to the provisions of Article X, after the Effective Time for
any and all Liabilities, Taxes, losses, damages, claims, costs and expenses,
interest, awards, judgments and penalties (including, without limitation,
attorneys' and consultants' fees and expenses actually suffered or incurred by
them (including, without limitation, any Action brought or otherwise initiated
by any of them) (hereinafter, a "Loss"), arising out of or resulting from:
(a) the breach of any representation or warranty made by the Company
contained in this Agreement; or
(b) the breach of any covenant or agreement by the Company contained in
this Agreement.
10.3. Indemnification by Parent. Each Company Shareholder, (each, a
"Shareholder Indemnified Party") shall be indemnified and held harmless by
Parent for any and all Losses arising out of or resulting from:
(a) the breach of any representation or warranty made by Parent or the
Merger Subsidiary contained in this Agreement; or
(b) the breach of any covenant or agreement by Parent or the Merger
Subsidiary contained in this Agreement.
10.4. Indemnification Procedures. For purposes of this Section 10.4, a
party against which indemnification may be sought is referred to as the
"Indemnitor" and the party which may be entitled to indemnification is referred
to as the "Indemnified Party". An Indemnified Party that seeks indemnification
from an Indemnitor pursuant to the terms of Section 10.2 or Section 10.3 hereof
shall give the Indemnitor written notice of any matter which an Indemnified
Party has determined has given or is likely to give rise to a right of
indemnification under this Agreement, within 30 days of such determination,
stating the amount of the Loss, if known, and method of computation thereof, and
containing a reference to the provisions of this Agreement in respect of which
such right of indemnification is claimed or arises; provided, however, that the
failure to provide such notice shall not release any Indemnitor from any of such
Indemnitor's obligations under this Article X except to the extent (a) any such
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Indemnitor is materially prejudiced by such failure or (b) such notice is not
given prior to the expiration of the time period specified in Section 10.1
hereof. The obligations and liabilities of any Indemnitor under this Article X
with respect to Losses arising from claims of any third party which are subject
to the indemnification provided for in this Article X ("Third Party Claims")
shall be governed by and be contingent upon the following additional terms and
conditions: if an Indemnified Party shall receive notice of any Third Party
Claim, the Indemnified Party shall give the Indemnitor notice of such Third
Party Claim within 20 days of the receipt by the Indemnified Party of such
notice; provided, however, that the failure to provide such notice shall not
release any Indemnitor from any of the Indemnitor's obligations under this
Article X except to the extent (a) any such Indemnitor is materially prejudiced
by such failure or (b) such notice is not given prior to the expiration of the
time period specified in Section 10.1 hereof. If the Indemnitor acknowledges in
writing such Indemnitor's obligation to indemnify the Indemnified Party
hereunder against any Losses that may result from such Third Party Claim, then
the Indemnitor shall be entitled to assume and control the defense of such Third
Party Claim at the Indemnitor's expense and through counsel of Indemnitor's
choice (reasonably satisfactory to the Indemnitee); provided, however, that if
there exists or is reasonably likely to exist a conflict of interest that would
make it inappropriate in the reasonable judgment of such counsel for the same
counsel to represent both the Indemnified Party and the Indemnitor, then the
Indemnified Party shall be entitled to retain its own counsel (reasonably
satisfactory to the Indemnitor) in each jurisdiction in which separate counsel
is required, at the expense of the Indemnitor. In the event the Indemnitor
exercises the right to undertake any such defense against any such Third Party
Claim as provided above, the Indemnified Party shall cooperate with the
Indemnitor in such defense and make available to the Indemnitor, at the expense
of the Indemnitor, all witnesses, pertinent records, materials and information
in the Indemnified Party's possession or under the Indemnified Party's control
relating thereto as is reasonably required by the Indemnitor. Similarly, in the
event the Indemnified Party is, directly or indirectly, conducting the defense
against any such Third Party Claim, the Indemnitor shall cooperate with the
Indemnified Party in such defense and make available to the Indemnified Party,
at the Indemnitor's expense, all such witnesses, records, materials and
information in their possession or under Indemnitor's control relating thereto
as is reasonably required by the Indemnified Party. No such Third Party Claim
may be settled by the Indemnitor without the prior written consent of the
Indemnified Party, which consent shall not be unreasonably withheld or delayed.
10.5. Limit on Indemnification. Notwithstanding anything to the
contrary contained in this Agreement from and after the Effective Time, the
Company Shareholders shall not be liable for aggregate indemnity obligations
under this Agreement in excess of $14,000,000, and each Company Shareholder's
liability for any individual Loss shall be equal to the amount of such Loss
multiplied by the percentage of the outstanding shares of the Company Common
Stock owned by such Company Shareholder immediately prior to the Effective Time.
In addition, no Company Shareholder shall be liable for aggregate
indemnification obligations in
A-39
<PAGE>
excess of $14,000,000 multiplied by the percentage of the outstanding shares of
the Company Common Stock owned by such Company Shareholder immediately prior to
the Effective Time.
10.6. Treatment of Indemnification Payments. To the fullest extent
permitted by law, the Company Shareholders and Parent agree to treat all
payments made by either of them to or for the benefit of the other (including
any payments to the Company) under this Article X, under other indemnity
provisions of this Agreement and for any misrepresentations or breaches of
warranties or covenants as adjustments to the purchase price or as capital
contributions for Tax purposes.
10.7. Sole Remedy. Subject to Section 12.7 hereof, after the Effective
Time, the sole remedy of the parties hereto and the Company Shareholders for
breach of this Agreement (other than fraud, willful misrepresentation or
intentional breach) shall be pursuant to this Article X.
ARTICLE XI
TERMINATION
11.1. Termination. This Agreement may be terminated:
(a) by the mutual consent of Parent and the Company;
(b) by Parent or the Company at any time after October 31, 2000 if for
any reason the Merger shall not by such date have been consummated and such
failure to consummate the Merger is not caused by a breach of this
Agreement by the terminating party;
(c) by Parent if there has been a material breach on the part of the
Company or the Principal Shareholders of a representation and warranty,
covenant or material obligation of the Company or the Principal
Shareholders set forth herein or in the Shareholders Agreement which, if
curable, has not been cured within ten days of notice thereof by Parent;
provided that such ten-day period shall be extended for an additional
twenty days if the Company or the Principal Shareholders shall be making
all reasonable attempts to cure such breach, unless the breach is not
susceptible of a cure;
(d) by the Company if there has been a material breach on the part of
Parent or the Merger Subsidiary of a representation and warranty, covenant
or material obligation of Parent or the Merger Subsidiary set forth herein
which, if curable, has not
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<PAGE>
been cured within ten days of notice thereof by the Company; provided that
such ten-day period shall be extended for an additional twenty days if
Parent or the Merger Subsidiary shall be making all reasonable attempts to
cure such breach, unless the breach is not susceptible of a cure; and
(e) by Parent or the Company if any court of competent jurisdiction or
other competent governmental or regulatory authority shall have issued an
order making illegal or otherwise restricting, preventing or prohibiting
the Merger and such order shall have become final and nonappealable.
11.2. Effect of Termination. If this Agreement is terminated by Parent
or the Company pursuant to Section 11.1, this Agreement will forthwith become
null and void and there will be no liability or obligation on the part of
Parent, the Merger Subsidiary or the Company (or any of their respective
representatives or affiliates), except that (i) the provisions of Section 7.1 of
this Agreement (with respect to payment of expenses) and Section 4.6 of the
Shareholders Agreement (with respect to confidential information of Parent and
its business) will continue to apply following any such termination and (ii)
nothing contained herein shall relieve any party hereto from liability for
breach of its representations, warranties, covenants or agreements contained in
this Agreement.
ARTICLE XII
MISCELLANEOUS PROVISIONS
12.1. Notices, Etc. All notices, requests, demands, and other
communications hereunder shall be in writing and shall be deemed to have been
duly given, when delivered in person, or when mailed by certified or registered
mail, postage prepaid, or when given by confirmed facsimile transmission, as
follows:
(a) If to the Company:
Primary Network Holdings, Inc.
11756 Borman Drive
St. Louis, MO 63146-4133
Attention: Mike Torrence, Esq.
Telephone: (314) 692-3527
Facsimile: (314) 995-5718
with copies to:
A-41
<PAGE>
Milbank, Tweed, Hadley & McCloy
601 S. Figueroa Street, 30th Floor
Los Angeles, CA 90017
Attention: Kenneth Baronsky
Telephone: (213) 892-4000
Facsimile: (213) 629-5063
(b) If to Parent or the Merger Subsidiary:
Mpower Communications Corp.
171 Sully's Trail, Suite 202
Pittsford, NY 14534
Attention: General Counsel
Telephone: (716) 218-6550
Facsimile: (716) 218-0615
with copies to:
Shearman & Sterling
599 Lexington Avenue
New York, NY 10022
Attention: Peter D. Lyons, Esq.
Telephone: (212) 848-4000
Facsimile: (212) 848-7179
or such other person as the person entitled to notice shall designate in
writing, such writing to be delivered to the other parties hereto in the manner
provided in this Section 12.1.
12.2. Survival of Representations and Warranties. Except as provided in
Section 10.1, the representations and warranties contained herein and in any
certificate delivered pursuant hereto shall not survive the Effective Time and
the consummation of any or all of the transactions contemplated hereby. This
Section 12.2 shall not limit the survival of any covenant or agreement of the
parties that by its terms contemplates performance after the Effective Time.
12.3. Entire Agreement; Amendment. This Agreement (including the
various Schedules and Exhibits hereto) sets forth the entire agreement and
understanding of the parties in respect of the transactions contemplated hereby
and supersedes all prior agreements, arrangements and understandings relating to
the subject matter hereof, except for the Mutual Confidentiality and
Nonsolicitation Agreement between the Company and Parent dated January 31, 2000.
This Agreement may be amended or modified only by a written instrument executed
by Parent, the Merger Subsidiary, and the Company in accordance with Delaware
GCL.
A-42
<PAGE>
12.4. Individual Provisions. If any provision of this Agreement is held
to be illegal, invalid or unenforceable under any present or future law, and if
the rights or obligations of any party hereto under this Agreement will not be
materially and adversely affected thereby, (i) such provision will be fully
severable, (ii) this Agreement will be construed and enforced as if such
illegal, invalid and unenforceable provision had never comprised a part hereof,
(iii) the remaining provisions of this Agreement will remain in full force and
effect and will not be affected by the legal, invalid or unenforceable
provision, and (iv) there will be added automatically as a part of this
Agreement a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible.
12.5. Press Releases. Until the Effective Time, the Company and Parent
shall agree with each other as to the form and substance of any press release
related to this Agreement or the transactions contemplated hereby, and shall
consult each other as to the form and substance of other public disclosures
related thereto; provided, however, that nothing contained herein shall prohibit
either party, following notification to the other party if practicable, from
making any disclosure which is required by law or the applicable rules of the
NASDAQ.
12.6. Governing Law; Consent to Jurisdiction; Venue; Waiver of Jury
Trial. (a) This Agreement shall be governed by the law of the State of New York
applicable to contracts executed and performed entirely with that State.
(b) Each of the parties hereto hereby irrevocably and unconditionally
submits, for itself and its property, to the exclusive jurisdiction of any New
York State court or federal court of the United States of America sitting in New
York City, and any appellate court from any thereof, in any action or proceeding
arising out of or relating to this Agreement, or for recognition or enforcement
of any judgment, and each of the parties hereto hereby irrevocably and
unconditionally agrees that all claims in respect of any such action or
proceeding may be heard and determined in any such New York State court or, to
the extent permitted by law, in such federal court. Such party agrees that a
final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner
provided by law. Nothing in this Agreement shall affect any right that any party
may otherwise have to bring any action or proceeding relating to this Agreement
in the courts of any jurisdiction.
(c) Each of the parties hereto irrevocably and unconditionally waives,
to the fullest extent it may legally and effectively do so, any objection that
it may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement in any New York State or
federal court. Such party hereby irrevocably waives, to the fullest extent
permitted by law, the defense of an inconvenient forum to the maintenance of
such action or proceeding in any such court.
A-43
<PAGE>
(d) Each of the parties hereto hereby waives all right to trial by jury
in any action, proceeding or counterclaim (whether based on contract, tort or
otherwise) arising out of or relating to this Agreement or the actions of the
parties in the negotiation, administration, performance or enforcement thereof.
12.7. Specific Performance. The parties hereto agree that irreparable
damage would occur in the event any provision of this Agreement was not
performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
12.8. General. This Agreement: (i) shall inure to the benefit of and be
binding on the parties hereto and their heirs, personal representatives,
successors and permitted assigns, nothing in this Agreement, expressed or
implied, being intended to confer upon any other person any rights or remedies
hereunder except for the parties benefitting from Sections 1.2(c) and 6.1 shall
be third party beneficiaries hereunder; (ii) may not be assigned by a party
without the prior written consent of the other parties (provided, however, that
it may be assigned by Parent and Merger Subsidiary to an affiliate of Parent
without the consent of the other parties hereto); and (iii) may be executed in
two or more counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument. The Section,
Schedule and other headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
[Remainder of this page intentionally left blank]
A-44
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement the day and year first above written.
PRIMARY NETWORK HOLDINGS, INC.
By:
-------------------------------
Name:
Title:
MPOWER COMMUNICATIONS CORP. (A/K/A
MGC COMMUNICATIONS, INC.)
By:
-------------------------------
Name: S. Gregory Clevenger
Title: Senior Vice President -
Corporate Development
MPOWER MERGER SUB, INC.
By:
-------------------------------
Name: S. Gregory Clevenger
Title: Vice President
A-45
<PAGE>
AGREEMENT AND PLAN OF MERGER
by and among
MPOWER COMMUNICATIONS CORP.
(A/K/A MGC COMMUNICATIONS, INC.),
MPOWER MERGER SUB, INC.,
and
PRIMARY NETWORK HOLDINGS, INC.
dated as of April 17, 2000
<PAGE>
TABLE OF CONTENTS
Section Page
ARTICLE I
THE MERGER
1.1. The Merger...................................................1
1.2. Conversion of Shares.........................................2
1.3. Surrender of Certificates; Payment of
Merger Consideration;Dissenting Shares....................4
1.4. Closing......................................................6
ARTICLE II
THE SURVIVING CORPORATION
2.1. Certificate of Incorporation.................................6
2.2. Bylaws.......................................................6
2.3. Board of Directors...........................................6
2.4. Officers.....................................................7
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
3.1. Company's Organization and Good Standing.....................7
3.2. Power and Authority; Execution and Delivery..................8
3.3. Capitalization and Voting Rights.............................8
3.4. Subsidiaries.................................................8
3.5. Valid Issuance of Company Shares;
Ownership of Company Shares...............................8
3.6. Financial Statements.........................................8
3.7. No Undisclosed Liabilities..................................10
3.8. Absence of Certain Changes;
Agreements with Affiliates...............................10
3.9. Governmental Approvals and Filings..........................12
3.10. Litigation..................................................12
3.11. Compliance with Laws........................................13
3.12. Permits; Compliance.........................................13
3.13. Intellectual Property.......................................13
3.14. No Conflict.................................................15
<PAGE>
Section ii Page
3.15. Material Contracts..........................................15
3.16. Employee Benefit Plans; Labor Matters.......................18
3.17. Tax Matters.................................................19
3.18. Minute Books................................................20
3.19. Year 2000 Compliance........................................20
3.20. Certain Interests...........................................20
3.21. Insurance...................................................21
3.22. Brokers and Finders.........................................21
3.23. Proxy Statement; Registration Statement.....................21
3.24. Customers. ................................................22
3.25. Sales Personnel.............................................22
3.26. Condition and Operation of the Assets.......................22
3.27. Knowledge...................................................22
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
PARENT AND THE MERGER SUBSIDIARY
4.1. Parent's and Merger Subsidiary's
Organization and Good Standing...........................22
4.2. Power and Authority; Execution and Delivery.................23
4.3. Governmental Approvals and Filings..........................23
4.4. No Conflict.................................................23
4.5. Merger Consideration........................................24
4.6 Capitalization..............................................24
4.7. Reports and Financial Statements............................24
4.8. No Undisclosed Liabilities..................................25
4.9. Absence of Certain Changes or Events........................25
4.10. Compliance with Laws........................................25
4.11. Litigation..................................................26
4.12. Ownership of Merger Subsidiary..............................26
4.13. Subsidiaries................................................26
4.14. Articles of Incorporation and Bylaws........................26
4.15. No Prior Activities.........................................26
4.16. Brokers and Finders.........................................26
4.18. Taxes.......................................................27
4.19. Registration Statement; Proxy Statement.....................27
<PAGE>
Section iii Page
ARTICLE V
COVENANTS OF THE COMPANY
5.1. Regular Course of Business; Restricted
Activities and Transactions..............................28
5.2. Access to Books, Records and Other Information..............28
5.3. Notice of Developments......................................28
5.4. No Solicitation or Negotiation..............................29
5.5. Preservation of Tax-Free Merger.............................29
5.6. Shareholders' Meeting.......................................29
5.7. Proxy Statement.............................................30
5.8. Opinions of Counsel.........................................30
ARTICLE VI
COVENANTS OF PARENT
6.1. Directors' and Officers'
Indemnification and Insurance............................30
6.2. Preservation of Tax-Free Merger.............................31
6.3. Certain Employee Matters....................................31
6.4. Opinions of Counsel.........................................31
6.5. Registration Statement......................................32
6.6. Stock Exchange Listing......................................32
6.7. Access to Information.......................................32
6.8. Notice of Developments......................................32
6.9. Credit Facility.............................................32
6.10. Current Public Information..................................33
ARTICLE VII
MUTUAL COVENANTS
7.1. Payment of Expenses.........................................33
7.2. Public Announcements........................................33
7.3. Further Action..............................................33
<PAGE>
Section iv Page
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF PARENT
8.1. Representations and Warranties True.........................34
8.2. Performance of Covenants....................................34
8.3. Opinion of Counsel..........................................34
8.4. Tax Opinion.................................................34
8.5. HSR; Other Approvals and Consents...........................35
8.7. Certificate of the Company..................................35
8.8. No Material Adverse Effect..................................35
8.9. Certificate of Merger.......................................35
8.10. FIRPTA......................................................35
8.11. NASDAQ Listing..............................................35
ARTICLE IX
CONDITIONS TO OBLIGATIONS OF THE COMPANY
9.1. Representations and Warranties True.........................36
9.2. Performance of Covenants....................................36
9.3. Tax Opinion.................................................36
9.4. Other Opinions..............................................37
9.5. HSR; Other Approvals and Consents...........................37
9.6. No Governmental or Other Proceeding or Litigation...........37
9.7. Certificate of Parent and the Merger Subsidiary.............37
9.8. Certificate of Merger.......................................37
9.9. No Material Adverse Effect..................................37
9.10. Registration Statement......................................37
9.11. NASDAQ Listing..............................................37
ARTICLE X
SURVIVAL AND INDEMNIFICATION
10.1. Survival of Representations and Warranties..................38
10.2. Indemnification by the Company Shareholders.................38
10.3. Indemnification by Parent...................................38
10.4. Indemnification Procedures..................................39
<PAGE>
Section v Page
10.5. Limit on Indemnification....................................40
10.6. Treatment of Indemnification Payments.......................40
10.7. Sole Remedy.................................................40
ARTICLE XI
TERMINATION
11.1. Termination.................................................40
11.2. Effect of Termination.......................................41
ARTICLE XII
MISCELLANEOUS PROVISIONS
12.1. Notices, Etc................................................41
12.2. Survival of Representations and Warranties..................42
12.3. Entire Agreement; Amendment.................................43
12.4. Individual Provisions.......................................43
12.5. Press Releases..............................................43
12.6. Governing Law; Consent to Jurisdiction;
Venue; Waiver of Jury Trial..............................43
12.7. Specific Performance........................................44
12.8. General.....................................................44
<PAGE>
Section vi Page
Action...............................................................12
Appraisal.............................................................5
Business..............................................................7
Certificate...........................................................3
Closing...............................................................6
Code..................................................................1
Company...............................................................1
Company Assets.......................................................22
Company Benefit Plans.................................................8
Company Material Adverse Affect.......................................7
Company Shareholder...................................................8
Company Shares........................................................2
Company Stock Options.................................................2
Company Stock Option Plan.............................................2
Company's Systems....................................................20
Delaware GCL..........................................................1
Dissenting Share......................................................5
Effective Time........................................................2
ERISA................................................................18
Financial Statements..................................................9
GAAP..................................................................9
Governmental Order...................................................12
HSR Act..............................................................12
Indebtedness..........................................................9
Incentive Stock Option...............................................3
Indemnified Party....................................................38
Indemnitor...........................................................38
Insurance Policies...................................................20
Intellectual Property................................................14
Law..................................................................13
Liabilities..........................................................10
Lien.................................................................10
Loss.................................................................38
Material Adverse Effect...........................................7, 25
Material Contracts...................................................15
Merger................................................................1
Merger Consideration..................................................2
Merger Subsidiary.....................................................1
Parent................................................................1
Parent Common Stock...................................................2
<PAGE>
Section vii Page
Parent Financial Statements..........................................25
Parent Indemnified Party.............................................38
Parent Material Adverse Affect.......................................25
Parent Preferred Stock...............................................24
Parent Securities Filings............................................24
Paying Agent..........................................................4
Permits..............................................................13
Principal Shareholders................................................1
Proxy Statement......................................................21
Reference Balance Sheet..............................................10
Registration Statement...............................................21
Returns..............................................................19
SEC..................................................................23
Securities Act.......................................................23
Secretary of State....................................................2
Shareholder Indemnified Party........................................38
Shareholders' Agreement...............................................1
Shareholders' Meeting................................................30
Surviving Corporation.................................................1
Taxes................................................................19
Third Party Claims...................................................39
Third Party Intellectual Property....................................14
Transferred Employees................................................31
Year 2000 Compliant..................................................20
<PAGE>
ANNEX B - OPINION OF
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
<PAGE>
Annex B
[Houlihan Lokey Letterhead]
April 19, 2000
The Board of Directors
Primary Network Holdings, Inc.
c/o Alan Schrager
Chief Financial Officer
Primary Network Holdings, Inc.
11756 Borman Dr.
St. Louis, MO 63146
Dear Directors:
We understand that Primary Network Holdings, Inc. (the "Company")
has entered into an Agreement and Plan of Merger pursuant to which:
i) each share of the Company's common stock and each share of
Company's preferred stock shall ultimately be converted into the
right to receive 0.02022 shares of registered, unrestricted
common stock, (such right is referred to herein as the "Merger
Consideration"), of MPower Communications Corp. ("MPower");
ii) the Company's stock options, whether or not exercisable and
whether or not vested shall remain outstanding and shall be
assumed by MPower and continue to have, and be subject to, the
same terms and conditions as set forth in the Company's existing
stock option plans and relevant agreements except that each of
the Company's stock options shall be exercisable for a number of
shares of MPower common stock equal to that number of shares of
MPower's common stock equal to the product of the number of
Company shares covered by such Company stock option multiplied by
the Merger Consideration; and
iii) as a result of the exchange of the Company's common stock for the
Merger Consideration, MPower will assume, either directly or
indirectly, the Company's existing indebtedness.
B - 1
<PAGE>
The exchange of the Company's common and preferred stock for the
Merger Consideration, MPower's assumption of the Company's stock options and
indebtedness, and all related transactions disclosed to Houlihan Lokey Howard &
Zukin are referred to collectively herein as the "Transaction."
You have requested our opinion (the "Opinion") as to the matters
set forth below. The Opinion does not address the Company's underlying business
decision to effect the Transaction. We have not been requested to, and did not,
solicit third party indications of interest in acquiring all or any part of the
Company. Furthermore, at your request, we have not negotiated the Transaction or
advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews,
analyses and inquiries as we have deemed necessary and appropriate under the
circumstances. Among other things, we have:
1. met with certain members of the senior management of the Company
to discuss the operations, financial condition, future prospects
and projected operations and performance of the Company;
2. visited certain facilities and business offices of the Company;
3. reviewed unaudited interim financial statements for the twelve
months ended February 29, 2000, which the Company's management
has identified as being the most current financial statements
available;
4. reviewed a summary term sheet relating to the Transaction,
furnished by the Company's management;
5. reviewed forecasts and projections prepared by the Company's
management with respect to the Company for the years ending
December 31, 2000 through 2007;
6. reviewed the historical market prices and trading volume for
MPower's public securities;
7. reviewed certain other publicly available financial data for
certain companies that we deem comparable to the Company, and
publicly available prices and premiums paid in other transactions
that we considered similar to the Transaction;
8. reviewed drafts of certain documents pertaining to the
Transaction; including
B - 2
<PAGE>
i) the Agreement and Plan of Merger by and among MPower
Communications Corp., MPower Merger Sub, Inc., and Primary
Network Holdings, Inc. dated as of April 17, 2000; and
ii) the Shareholders Agreement by and among MPower
Communications Corp., MPower Merger Sub, Inc., Primary
Network Holdings, Inc., and the persons named as "Principal
Shareholders" on the signature pages of such Agreement dated
April 17, 2000; and
9. conducted such other studies, analyses and inquiries as we have
deemed appropriate.
We have relied upon and assumed, without independent
verification, that the financial forecasts and projections provided to us have
been reasonably prepared and reflect the best currently available estimates of
the future financial results and condition of the Company, and that there has
been no material change in the assets, financial condition, business or
prospects of the Company since the date of the most recent financial statements
made available to us.
We have not independently verified the accuracy and completeness
of the information supplied to us with respect to the Company and do not assume
any responsibility with respect to it. We have not made any physical inspection
or independent appraisal of any of the properties or assets of the Company. Our
opinion is necessarily based on business, economic, market and other conditions
as they exist and can be evaluated by us at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our
opinion that the consideration to be received by stockholders of the Company in
connection with the Transaction is fair to them from a financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
B - 3
<PAGE>
ANNEX C - SHAREHOLDERS AGREEMENT AMONG MPOWER, PRIMARY
NETWORK AND THE ENTITIES LISTED ON SCHEDULE A THERETO
<PAGE>
Annex C
SHAREHOLDERS AGREEMENT
SHAREHOLDERS AGREEMENT, dated as of April 17, 2000 by and among MPOWER
COMMUNICATIONS CORP. (A/K/A MGC COMMUNICATIONS, INC.), a Nevada corporation
("Parent"), MPOWER MERGER SUB, INC., a Delaware corporation and a wholly owned
subsidiary of Parent (the "Merger Subsidiary"), PRIMARY NETWORK HOLDINGS, INC.,
a Delaware corporation (the "Company"), and the persons named as "Principal
Shareholders" on the signature pages of this Agreement (each, a "Principal
Shareholder" and, collectively, the "Principal Shareholders").
WHEREAS, Parent and the Merger Subsidiary are entering into an
Agreement and Plan of Merger dated as of the date hereof (the "Merger
Agreement"; capitalized terms being used herein as defined therein unless
otherwise defined herein) with the Company, pursuant to which the Company shall
be merged with and into the Merger Subsidiary at the Effective Time;
WHEREAS, each Principal Shareholder is the record and beneficial owner
of the number of shares of Company Common Stock or Preferred Stock
(collectively, the "Company Shares") set forth on Schedule A hereto;
WHEREAS, as a condition to entering into the Merger Agreement and
incurring the obligations set forth therein, Parent and the Merger Subsidiary
have required that the Principal Shareholders agree to enter into this
Agreement; and
WHEREAS, the Principal Shareholders believe that it is in the best
interests of the Company and its stockholders to induce Parent and the Merger
Subsidiary to enter into the Merger Agreement and, therefore, the Principal
Shareholders are willing to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained herein, and intending to be legally bound
hereby, the parties hereto agree as follows:
ARTICLE I
VOTING AGREEMENT
----------------
1.1. Voting Agreement. Each Principal Shareholder hereby agrees that
during the time this Agreement is in effect, at any meeting of
the Company Shareholders, however called, and in any action by consent of the
stockholders of the Company it shall vote all of the Company Shares: (A) in
favor of the Merger, this Agreement (as it may be amended from time
to time) and the transactions contemplated by this Agreement, and (B) against
any other proposal for any recapitalization, merger or other transaction
requiring a vote of the Company Shareholders.
C-1
<PAGE>
1.2 Irrevocable Proxy. In the event a Principal Shareholder shall fail
to comply with the provisions of Section 1.1 hereof as determined by Parent in
its sole discretion, such Principal Shareholder agrees that such failure shall
result, without any further action by such Principal Shareholder, in the
irrevocable appointment of Parent, until termination of this Agreement, as such
Principal Shareholder's attorney and proxy pursuant to the provisions of Section
212(c) of the Delaware GCL, with full power of substitution, to vote, and
otherwise act (by written consent or otherwise) with respect to the Company
Shares which such Principal Shareholder is entitled to vote at any meeting of
Company Shareholders (whether annual or special and whether or not an adjourned
or postponed meeting) or consent in lieu of any such meeting or otherwise, on
the matters and in the manner specified in Section 1.1 hereof. THIS PROXY AND
POWER OF ATTORNEY IS IRREVOCABLE AND COUPLED WITH AN INTEREST. Each Principal
Shareholder hereby revokes all other proxies and powers of attorney with respect
to the Company Shares which such Principal Shareholder may have heretofore
appointed or granted, and no subsequent proxy or power of attorney shall be
given or written consent executed (and if given or executed, shall not be
effective) by such Principal Shareholder with respect thereto. All authority
herein conferred or agreed to be conferred shall survive the death or incapacity
of each Principal Shareholder and any obligation of a Principal Shareholder
under this Agreement shall be binding upon the heirs, personal representatives
and successors of such Stockholder.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF
---------------------------------
PRINCIPAL SHAREHOLDERS
----------------------
Each of the Principal Shareholders hereby severally and not jointly
represents and warrants to Parent and the Merger Subsidiary as follows:
2.1. Capacity and Authority. Such Principal Shareholder has full legal
capacity and requisite right, power and authority to execute, deliver and
perform its obligations under this Agreement. This Agreement has been duly
executed and delivered by such Principal Shareholder, and such execution and
delivery have been duly approved and authorized by all requisite action on the
part of such Principal Shareholder and such approval and authorization has not
been rescinded. This Agreement constitutes the legal, valid and binding
obligation of such Principal Shareholder, enforceable against it in accordance
with its terms. With respect to any Principal Shareholder who is an individual,
the failure of the spouse, if any, of such Principal Shareholder to be a party
or signatory to this Agreement shall not (i) prevent such Principal Shareholder
from performing such Principal Shareholder's obligations and consummating the
transactions contemplated hereunder or (ii) prevent this Agreement from
constituting the legal, valid and binding obligation of such Principal
Shareholder in accordance with its terms.
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2.2. No Conflicts. Except as set forth on Schedule 2.2, neither the
execution, delivery and performance of this Agreement by such Principal
Shareholder, nor the consummation by such Principal Shareholder of the
transactions contemplated hereby, will (a) conflict with, or result in a breach
of, any of the terms, conditions or provisions of the Certificate of
Incorporation or bylaws of such Principal Shareholder, (b) conflict with, result
in a breach or violation of any Law or Governmental Order or give rise to a
default under or result in the acceleration of performance under any contract to
which such Principal Shareholder or any of his assets, properties or businesses
may be subject, or (c) give rise to an imposition of any Lien of any nature
whatsoever upon any of such Principal Shareholder's Company Shares.
2.3. Ownership of Shares. Such Principal Shareholder has good and
marketable title to such Principal Shareholder's Company Shares free and clear
of any Liens and is not a party to any agreement, trust or other arrangement
that in any way restricts the Principal Shareholder's ability to perform its
obligations under this Agreement, including, without limitation, voting or
transferring such Company Shares, or other related to the Company Shares.
2.4. Government Approvals and Filings. Except for the filings required
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, no
approval, authorization, consent, license, clearance or order of, declaration,
or notification to, or filing, registration or compliance with any governmental
or regulatory authority is required to permit such Principal Shareholder to
enter into this Agreement or to consummate the transactions contemplated herein.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
------------------------------
OF PARENT AND THE MERGER SUBSIDIARY
-----------------------------------
Parent and the Merger Subsidiary hereby severally and jointly represent
and warrant to each Principal Shareholder as follows:
3.1. Parent's and Merger Subsidiary's Organization and Good Standing.
Each of Parent and the Merger Subsidiary is a corporation duly incorporated,
validly existing and in good standing under the laws of the States of Nevada and
Delaware, respectively, and has all corporate power and authority to own, lease
and operate its properties and to carry on its business as now being conducted.
Each of Parent and the Merger Subsidiary is duly qualified to do business and in
good standing in each jurisdiction where the character of property owned or
leased by it or the nature of its activities makes such qualification necessary,
except for those jurisdictions where the failure to be so qualified would not
materially prevent or delay consummation of the transactions contemplated by
this Agreement.
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3.2. Power and Authority; Execution and Delivery. Each of Parent and
the Merger Subsidiary has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby have been duly approved and authorized by
all requisite corporate action of Parent and the Merger Subsidiary and such
approval has not been modified or rescinded. This Agreement has been duly
executed and delivered by Parent and the Merger Subsidiary and constitutes the
legal, valid and binding obligation of Parent and the Merger Subsidiary
enforceable against Parent and the Merger Subsidiary in accordance with its
terms.
3.3. Governmental Approvals and Filings. Except for the filing under
the HSR Act and the filing of a certificate of merger in accordance with the
Delaware GCL, no approval, authorization, consent, license, clearance or order
of, declaration or notification to, or filing, registration or compliance with,
any governmental or regulatory authority, is required in order to permit Parent
and the Merger Subsidiary to enter into this Agreement or to consummate the
transactions contemplated herein.
3.4. No Conflict. Neither the execution, delivery and performance of
this Agreement by Parent and the Merger Subsidiary, nor the consummation by
Parent and the Merger Subsidiary of the transactions contemplated hereby will
(i) conflict with, or result in a breach of any of the terms, conditions or
provisions of the Certificates of Incorporation or By-laws of Parent and the
Merger Subsidiary (ii) conflict with, result in a breach or violation of, give
rise to a default under or result in the acceleration of performance under any
mortgage, lease, agreement, note, bond, indenture, guarantees or any Law or
Governmental Order to which Parent or the Merger Subsidiary may be subject,
which conflict, breach, default, violation or acceleration would not materially
prevent or delay consummation of the transactions contemplated by this
Agreement, or (iii) give rise to an imposition of any Lien, charge, security
interest or encumbrance of any nature whatsoever upon any of the assets of
Parent or the Merger Subsidiary.
ARTICLE IV
COVENANTS OF THE PRINCIPAL SHAREHOLDERS
---------------------------------------
4.1. No-Sale Agreements. Each Principal Shareholder agrees that such
Principal Shareholder shall not between the date hereof and the Effective Time
make any sale, transfer or other disposition of, or permit the incurrence of any
Lien on, its Company Shares.
4.2. No Solicitation or Negotiation. Each of the Principal Shareholders
agrees that between the date of this Agreement and the earlier of (i) the
Effective Time and (ii) the termination of this Agreement, no such Principal
Shareholder or any of its affiliates, officers, directors, representatives or
agents will (a) solicit, initiate, consider, encourage or accept any other
proposals or offers from any person or entity (A) relating to any acquisition or
purchase of all or any portion of the capital stock or a material portion of the
assets of the Company or any
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Company Subsidiary, (B) to enter into any business combination with the Company
or any Company Subsidiary or (C) to enter into any other extraordinary business
transaction involving or otherwise relating to the Company or any Company
Subsidiary or (b) participate in any discussions, conversations, negotiations or
other communications regarding, or furnish to any other person or entity any
information with respect to, or otherwise cooperate in any way, assist or
participate in, facilitate or encourage, any effort or attempt by any other
person or entity to seek to do any of the foregoing. Each Principal Shareholder
agrees to immediately cease and cause to be terminated all existing discussions,
conversations, negotiations and other communications with any persons or
entities conducted heretofore with respect to any of the foregoing. Each
Principal Shareholder agrees to notify Parent promptly if any such proposal or
offer, or any inquiry or other contact with any person or entity with respect
thereto, is made and shall, in any such notice to Parent, indicate in reasonable
detail the identity of the person or entity making such proposal, offer, inquiry
or contact and the terms and conditions of such proposal, offer, inquiry or
other contact. Each Principal Shareholder agrees not to, without the prior
written consent of Parent, release any person or entity from, or waive any
provision of, any confidentiality or standstill agreement relating to the
Company to which such Principal Shareholder is a party. Pursuant to the terms of
any existing confidentiality agreement to which such Principal Shareholder is a
party, such Principal Shareholder agrees to cause the return or destruction of
any confidential or proprietary information relating to the Company in the
possession of any third party.
4.3. Non-Competition. (a) For a period of three 3 years after the
Effective Time (the "Restricted Period"), none of Brian Matthews, Carol
Matthews, Charles Weigert and Welton Brison (the "Founders") shall engage,
directly or indirectly, in any business anywhere in the world that markets,
distributes, sells, or supplies services of the kind marketed, distributed, sold
or supplied by the Company as of the Effective Time or directly or indirectly,
own an interest in, manage, operate, join, control, lend money or render
financial or other assistance to or participate in or be connected with, as an
officer, employee, partner, stockholder, consultant or otherwise, any person
that competes with the Company or any Company Subsidiary in marketing,
distributing, selling or supplying services of the kind marketed, distributed,
sold or supplied by the Company or any Company Subsidiary, as of the Effective
Time; provided, however, that nothing contained herein shall prohibit or
restrict the Founders from engaging directly or indirectly in any business that
owns, operates, develops, designs, supports, markets, distributes, sells or
supplies (x) fantasy sports games, learning tools or newspaper publications
through web-based, web-enabled data base or other systems, (y) e-commerce,
system integration, web development, web hosting or related consulting services
or (z) sporting teams, sporting arenas or sporting events promotions and
provided, further, that, for the purposes of this Section 4.3, ownership of
securities having no more than five percent of the outstanding voting power of
any competitor which are listed on any national securities exchange or traded
actively in the national over-the-counter market shall not be deemed to be in
violation of this Section 4.3 so long as the person owning such securities has
no other connection or relationship with such competitor.
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(b) As a separate and independent covenant, for the Restricted Period,
the Founders will not, and will not permit their affiliates to, in any way,
directly or indirectly, for the purpose of conducting or engaging in any
business that markets, distributes, sells or supplies services of the kind
marketed, distributed, sold or supplied by the Company or any Company Subsidiary
as of the Effective Time, call upon, solicit, advise or otherwise do, or attempt
to do, business with whom the Company or any Company Subsidiary had any dealings
prior to the Effective Time or take away or interfere or attempt to interfere
with any custom, trade, business or patronage of the Company or any Company
Subsidiary.
(c) During the Restricted Period, none of the Founders will (i) employ
or directly or indirectly retain or engage as a consultant, or directly or
indirectly solicit the employment of, any person who at the time of such
solicitation is a director, officer or employee of the Company or any Company
Subsidiary or (ii) interfere with or attempt to interfere with any person who at
the time of such action is an officer or employee of the Company or any Company
Subsidiary, or induce or attempt to induce any of them to leave the employ of
the Company or any Company Subsidiary or violate the terms of their contracts,
or any employment agreements with the Company or any Company Subsidiary;
provided, however, that any of the Founders may employ or retain or engage as a
consultant Michael Torrence or any employee of the Company or any Company
Subsidiary who leaves the employ of the Company or any Company Subsidiary
without any inducement or attempted inducement by any of the Founders.
(d) The Restricted Period shall be extended by the length of any period
during which any of the Founders is in breach of the terms of this Section 4.3.
(e) The Founders acknowledge that the covenants of the Founders set
forth in this Section 4.3 are an essential element of this Agreement and of the
Merger Agreement and that, but for the agreement of the Founders to comply with
these covenants, Parent would not have entered into the Merger Agreement. Parent
acknowledges that this Section 4.3 constitutes an independent covenant and shall
not be affected by performance or nonperformance of any provision of the Merger
Agreement by Parent. The Founders have independently consulted with their
counsel and after such consultation agrees that the covenants set forth in this
Section 4.3 are reasonable and proper.
4.4. Preservation of Tax-Free Merger. Each Principal Shareholder agrees
that it will not, and will not permit any of its shareholders or affiliates to,
without the prior written waiver by Parent, knowingly take any action intended
or reasonably likely to prevent or impede the Merger from qualifying as a
tax-free reorganization within the meaning of Section 368(a) of the Code.
4.5. Opinions of Counsel. Each Principal Shareholder agrees that it
will use all reasonable efforts and will act in good faith, to ensure that the
opinions specified in Sections 8.3 and 9.3 of the Merger Agreement are
delivered, including, without limitation the delivery by the Company and such
Principal Shareholders of representation letters or certificates as to such
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matters as the counsels for Parent and the Company may reasonably request in
order to render such opinion.
4.6. Confidentiality. Each Principal Shareholder agrees to, and shall
cause its agents, representatives, affiliates, employees, officers and directors
to, treat and hold as confidential and not use (and not disclose or provide
access thereto to any person or entity) all information relating to trade
secrets, processes, trademark applications, product development, computer
software, prices, customer and supplier lists, lists and information regarding
independent contractors, pricing and marketing plans, policies and strategies,
details of client and consultant contracts, operations methods, product
development techniques, business plans, business acquisition plans, new
personnel acquisition plans and all other confidential or proprietary
information with respect to Parent (or its affiliates) or its business, or the
Company or the Company Subsidiaries, or the Business; provided, however, that
this Section 4.6 shall not apply to information which is or becomes generally
available to the public other than as a result of a wrongful disclosure by a
Principal Shareholder of the Company. Each Principal Shareholder agrees that it
shall deliver to the Company at or prior to the Effective Time all such
information in its or its affiliates' possession.
4.7. Notice of Developments. Prior to the Effective Time, the
Company shall promptly notify Parent in writing of (a) all events,
circumstances, facts and occurrences arising subsequent to the date of this
Agreement which could result in any breach of a representation or warranty or
covenant of the Company in this Agreement or which could have the effect of
making any representation or warranty of the Company or the Principal
Shareholders in this Agreement untrue or incorrect in any material respect and
(b) all other material developments affecting the Company's assets, Liabilities,
business, financial condition, operations, results of operations, customer or
supplier relations, employee relations or prospects of the Company and the
Company Subsidiaries or the Business.
4.8 Indemnification. Each Principal Shareholders agrees to the
indemnity obligations of the Company Shareholders in Article X of the Merger
Agreement to the extent applicable to such Principal Shareholder and subject to
the limitations contained in Section 10.5 of the Merger Agreement.
ARTICLE V
TERMINATION
-----------
5.1. Termination. Each Principal Shareholder's obligations hereunder
shall terminate in the event of a termination pursuant to Article XI of the
Merger Agreement, except that (i) the provisions of Section 4.6 of this
Agreement (with respect to confidential information of Parent and its business)
shall continue to apply and (ii) nothing contained herein shall relieve
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any party hereto from liability for breach of its representations, warranties,
covenants or agreements contained in this Agreement or the Merger Agreement.
ARTICLE VI
MISCELLANEOUS PROVISIONS
------------------------
6.1. Notices, Etc. All notices, requests, demands, and other
communications hereunder shall be in writing and shall be deemed to have been
duly given, when delivered in person, or when mailed by certified or registered
mail, postage prepaid, or when given by confirmed facsimile transmission, as
follows:
(a) If to the Company:
Primary Network Holdings, Inc.
11756 Borman Drive
St. Louis, MO 63146-4153
Attention: Mike Torrence, Esq.
Telephone: (314) 692-3527
Facsimile: (314) 995-5718
with copies to:
Milbank, Tweed, Hadley & McCloy
601 S. Figueroa Street, 30th Floor
Los Angeles, CA 90017
Attention: Kenneth J. Baronsky, Esq.
Telephone: (213) 892-4000
Facsimile: (213 892-4733
(b) If to Parent or the Merger Subsidiary:
Mpower Communications Corp.
171 Sully's Trail, Suite 202
Pittsford, NY 14534
Attention: General Counsel
Telephone: (716) 218-6550
Facsimile: (716) 218-0615
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with copies to:
Shearman & Sterling
599 Lexington Avenue
New York, NY 10022
Attention: Peter D. Lyons, Esq.
Telephone: (212) 848-4000
Facsimile: (212) 848-7179
(b) If to the Principal Shareholders:
To the addresses listed on Schedule B hereto
or such other person as the person entitled to notice shall designate in
writing, such writing to be delivered to the other parties hereto in the manner
provided in this Section 6.1.
6.2. Entire Agreement; Amendment. This Agreement (including the various
Schedules and Exhibits hereto) sets forth the entire agreement and understanding
of the parties in respect of the transactions contemplated hereby and supersedes
all prior agreements, arrangements and understandings relating to the subject
matter hereof. This Agreement may be amended or modified only by a written
instrument executed by Parent, the Company and the holders of a majority of the
Company Shares held by the Principal Shareholders (the "Majority Holders");
provided, however, that if any such amendment or modification would have a
material adverse impact on any Principal Shareholder that is different in
character or proportionate impact than the impact on the other Principal
Shareholders, then the prior written consent of each Principal Shareholder so
adversely affected shall also be required; provided further that Section 4.3 may
be amended or modified by a written instrument signed by each Founder affected
by such amendment and the Parent and such amendment or modification shall not
require the approval of the Majority Holders.
6.3. Individual Provisions. If any provision of this Agreement is held
to be illegal, invalid or unenforceable under any present or future law, and if
the rights or obligations of any party hereto under this Agreement will not be
materially and adversely affected thereby, (i) such provision will be fully
severable, (ii) this Agreement will be construed and enforced as if such
illegal, invalid and unenforceable provision had never comprised a part hereof,
(iii) the remaining provisions of this Agreement will remain in full force and
effect and will not be affected by the legal, invalid or unenforceable
provision, and (iv) there will be added automatically as a part of this
Agreement a legal, valid and enforceable provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible.
6.4. Governing Law; Consent to Jurisdiction; Venue; Waiver of Jury
Trial. (a) This Agreement shall be governed by the law of the State of New York
applicable to contracts executed and performed entirely with that State
(b) Each of the parties hereto hereby irrevocably and unconditionally
submits, for itself and its property, to the exclusive jurisdiction of any New
York State court or federal
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court of the United States of America sitting in New York City, and any
appellate court from any thereof, in any action or proceeding arising out of or
relating to this Agreement, or for recognition or enforcement of any judgment,
and each of the parties hereto hereby irrevocably and unconditionally agrees
that all claims in respect of any such action or proceeding may be heard and
determined in any such New York State court or, to the extent permitted by law,
in such federal court. Such party agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Nothing in this Agreement shall affect any right that any party may otherwise
have to bring any action or proceeding relating to this Agreement in the courts
of any jurisdiction.
(c) Each of the parties hereto irrevocably and unconditionally waives,
to the fullest extent it may legally and effectively do so, any objection that
it may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement in any New York State or
federal court. Such party hereby irrevocably waives, to the fullest extent
permitted by law, the defense of an inconvenient forum to the maintenance of
such action or proceeding in any such court.
(d) Each of the parties hereto hereby waives all right to trial by
jury in any action, proceeding or counterclaim (whether based on contract, tort
or otherwise) arising out of or relating to this Agreement or the actions of the
parties in the negotiation, administration, performance or enforcement thereof.
6.5. Specific Performance. The parties hereto agree that irreparable
damage would occur in the event any provision of this Agreement was not
performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
6.6. General. This Agreement: (i) shall inure to the benefit of and be
binding on the parties hereto and their heirs, personal representatives,
successors and permitted assigns, nothing in this Agreement, expressed or
implied, being intended to confer upon any other person any rights or remedies
hereunder; (ii) may not be assigned by a party without the prior written consent
of the other parties (provided, however, that it may be assigned by Parent and
Merger Subsidiary to an affiliate of Parent without the consent of the other
parties hereto); and (iii) may be executed in two or more counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument. The Section, Schedule and other headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
(The remainder of this page is intentionally left blank)
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IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement the day and year first above written.
PRIMARY NETWORK HOLDINGS, INC.
By:
--------------------------------
Name: Brian Matthews
Title: Chief Executive Officer
MPOWER COMMUNICATIONS CORP. (A/K/A
MGC COMMUNICATIONS, INC.)
By:
--------------------------------
Name: S. Gregory Clevenger
Title: Senior Vice President -
Corporate Development
MPOWER MERGER SUB, INC.
By:
--------------------------------
Name: S. Gregory Clevenger
Title: Vice President
PRINCIPAL SHAREHOLDERS:
--------------------------------
Brian Matthews
--------------------------------
Carol Matthews
--------------------------------
Charles Weigert
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--------------------------------
Welton Brison
--------------------------------
Tom Hesterman
--------------------------------
Richard Phillips
--------------------------------
John Alden
EC PRIMARY LLC
By:
-------------------------
Name:
-------------------------
Title:
-------------------------
QUANTUM EMERGING GROWTH PARTNERS
CV
By:
-------------------------
Name:
-------------------------
Title:
-------------------------
TGV PARTNERS
By:
-------------------------
Title:
-------------------------
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SCHEDULE A
- --------------------------------------------------------------------------------
Shareholder Name Number of Shares Owned
- --------------------------------------------------------------------------------
Brian Matthews 4,041,586
- --------------------------------------------------------------------------------
Carol Matthews 4,121,691
- --------------------------------------------------------------------------------
Charles Weigert 3,713,940
- --------------------------------------------------------------------------------
Welton Brison 3,218,489
- --------------------------------------------------------------------------------
Tom Hesterman 2,201,309
- --------------------------------------------------------------------------------
Richard Phillips 1,558,180
- --------------------------------------------------------------------------------
John Alden 657,208
- --------------------------------------------------------------------------------
EC Primary LLC 18,252,280
- --------------------------------------------------------------------------------
Quantum Emerging Growth Partners C.V. 7,439,318
- --------------------------------------------------------------------------------
TGV Partners 1,318,152
- --------------------------------------------------------------------------------
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ANNEX D - LETTER AGREEMENT RE EXCHANGE OFFER
<PAGE>
Annex D
[Mpower Letterhead]
Corporate Headquarters
171 Sully's Trail, Suite 202
Pittsford, NY 14534
April 17, 2000
EC Primary, L.P.
The Bank of Butterfield
65 Front Street, 6th Floor
Hamilton, Bermuda HM-12
Quantum Emerging Growth Partners C.V.
The Bank of Butterfield
65 Front Street, 6th Floor
Hamilton, Bermuda HM-12
Ravich Revocable Trust of 1989
201 Alma Real Drive
Pacific Palisades, CA 90272
The Ravich Children Permanent Trust
c/o Keenan Wolens, Amir Development Co.
8730 Wilshire Blvd., Suite 300
Beverly Hills, CA 90211
U.S. Bancorp Libra
11766 Wilshire Blvd., Suite 870
Los Angeles, CA 90025
TGV/Primary Investors LLC
c/o TGV Partners
605 High Valley Court
Colorado Springs, CO 80906
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Ladies and Gentlemen:
Mpower Communications Corporation (a/k/a MGC Communications,
Inc.) ("Parent"), Mpower Merger Subsidiary, Inc. ("Merger Subsidiary") and
Primary Network Holdings, Inc. ("PNI") have entered into an Agreement and Plan
of Merger dated April 17, 2000 (the "Merger Agreement") whereby Merger
Subsidiary will be merged into PNI (the "Merger"). Upon the terms and subject to
the conditions set forth below, Parent agrees that promptly following the
Effective Time, Parent will commence an offer (the "Exchange Offer") to exchange
its 13% Senior Notes due 2010 (the "Senior Notes") for any and all outstanding
12% Senior Subordinated Discount Notes due 2006 of PNI (the "Discount Notes").
Concurrently with the Exchange Offer, Parent will also solicit consents (the
"Consent Solicitation") from the Discount Note Holders to certain amendments to
the purchase agreement pursuant to which the Discount Notes were issued (the
"Discount Notes Agreement"). The proposed amendments will delete substantially
all of the restrictive covenants contained in the Discount Notes Agreement, and
the acceptance of Discount Notes tendered in the Exchange Offer will be
conditioned on such consents and the holder thereof agreeing to the restrictions
on sale described in Paragraph III below. Upon the terms and subject to the
conditions set forth below each of EC Primary, L.L.C., Quantum Emerging Growth
Partners C.V., Ravich Revocable Trust of 1989, The Ravich Children Permanent
Trust, U.S. Bancorp Libra, TGV/Primary Investors LLC (the "Primary Holders")
agrees to tender its Discount Notes in the Exchange Offer and to consent to the
proposed amendments in the Consent Solicitation. Upon completion of the Exchange
Offer, Parent will issue to the Primary Holders 50,000 shares of common stock,
par value $.001 per share, of Parent ("Parent Common Stock"), pro rata.
Capitalized terms not otherwise defined are used herein as defined in the Merger
Agreement.
I. Terms of the Senior Notes and the Exchange Offer
The Senior Notes to be issued in the Exchange Offer will be
issued under the indenture dated as of March 24, 2000 (the "Senior Notes
Indenture") and will have the same terms, and will be of the same class, as
Parent's currently outstanding Senior Notes which were originally issued on
March 24, 2000 under the Senior Notes Indenture.
For each $1,000 of Accreted Value (as defined in the Discount
Notes) as of the Effective Time of Discount Notes tendered for exchange, Parent
will deliver Senior Notes having a Fair Value of $1,000; provided, however, that
principal amount of such Senior Notes will be reduced by the amount of accrued
interest on the Senior Notes from March 24, 2000 through the Effective Time.
Fair Value shall mean the average of the bids to purchase $10 million of the
Senior Notes to be obtained two business days prior to the Effective Date by
Parent and the Primary Holders from two investment banking firms to be agreed
upon by Parent and the Primary Holders (the "Initial Banks") if neither bid is
more than five percent higher than the other bid. If one such bid is more than
five percent higher than the other such bid, then Parent and the Primary Holders
shall obtain a bid from another investment banking firm (the "Third Bank"). If
the bid obtained from the Third Bank is equal to, one of, or between, the bids
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obtained from the Initial Banks, then Fair Value shall be the bid by the Third
Bank. If the bid by the Third Bank is higher or lower than the bids from either
Initial Bank, then Fair Value shall be the average of the bid by the Third Bank
and the bid by the Initial Bank that is closer to the bid by the Third Bank.
The aggregate principal amount of Senior Notes to be delivered
to each Discount Noteholder pursuant to the Exchange Offer will be rounded to
the nearest $1,000, with amounts of $499 being rounded down and amounts of $500
being rounded up.
II. Registration
The Senior Notes to be issued in the Exchange Offer and the
shares of Parent Common Stock to be issued to the Primary Holders will be
registered under the Securities Act pursuant to a registration statement on Form
S-4 to be filed by Parent with the Securities and Exchange Commission ("SEC").
III. Restrictions on Sale
Each Discount Note Holder receiving Senior Notes in the
Exchanger Offer will agree that, during the six month period following the
issuance of the Senior Notes pursuant to the Exchange Offer, it will not
directly or indirectly (1) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, lend, or otherwise transfer or dispose
of any Senior Notes or any securities convertible into or exercisable or
exchangeable for Senior Notes or (2) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of any Senior Notes or otherwise establish or maintain a "put
equivalent position" (within the meaning of Rule 16a-1(h) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), whether any such
transaction described in clause (1) or (2) above is to be settled by delivery of
Senior Notes or such other securities, in cash or otherwise, provided, however,
the such Discount Note Holders may offer, sell or contract to sell the Senior
Notes at the par value of the Senior Notes plus accrued interest or a higher
amount or may be released from its obligations under this paragraph with the
prior written consent of Bear Stearns & Co, Inc.
IV. Representations and Warranties of Parent and Merger Subsidiary
As an inducement to the Primary Holders to enter into this
Letter Agreement, Parent represents and warrants to the Primary Holders as
follows:
1. Parent has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Letter Agreement. The
execution, delivery and performance of this Letter Agreement and the
consummation of the transactions contemplated hereby have been duly approved and
authorized by all requisite corporate action of Parent and such approval has not
been modified or rescinded. Except for the filing of a certificate of merger in
accordance with the Delaware General Corporate Law, no further corporate actions
or approval on the part of Parent or Merger Subsidiary are required under
applicable law for the
D - 3
<PAGE>
consummation of the Merger or the transactions contemplated hereby. This Letter
Agreement has been duly executed and delivered by Parent and constitutes the
legal, valid and binding obligation of Parent, enforceable against Parent in
accordance with its terms, subject to the effect of any applicable bankruptcy
insolvency (including, without limitation, all laws relating to fraudulent
transfers), reorganization, moratorium or similar laws affecting creditors
rights generally and subject to the effect of general principles of equity
(regardless of whether considered in a proceeding at law or in equity).
2. Except for the filing of a Registration Statement on Form S-4
pursuant to the Securities Act of 1933, as amended (the "Securities Act"), with
SEC, no approval, authorization, consent, license, clearance or order of,
declaration or notification to, or filing, registration or compliance with, any
governmental or regulatory authority, is required in order to permit Parent to
enter into this Letter Agreement or to consummate the transactions contemplated
herein. Except for the filings required under the HSR Act, the filing of a
certificate of merger in accordance with the Delaware GCL, and the filing of a
Registration Statement on Form S-4 pursuant to the Securities Act of 1933, as
amended (the "Securities Act") with the Securities and Exchange Commission (the
"SEC"), no approval, authorization, consent, license, clearance or order of,
declaration or notification to, or filing, registration or compliance with, any
governmental or regulatory authority, is required in order to permit Parent or
the Merger Subsidiary to enter into this Agreement or to consummate the
transactions contemplated herein.
3. Neither the execution, delivery and performance of this
Letter Agreement by Parent, nor the consummation by Parent of the transactions
contemplated hereby will (i) conflict with, or result in a breach of any of the
terms, conditions or provisions of the Certificates of Incorporation or By-laws
of Parent or the Merger Subsidiary, (ii) conflict with, result in a breach or
violation of, give rise to a default under or result in the acceleration of
performance under any mortgage, lease, agreement, note, bond, indenture,
guarantees or any Law or Governmental Order to which Parent or the Merger
Subsidiary may be subject, which conflict, breach, default, violation or
acceleration would not materially prevent or delay consummation of the
transactions contemplated by this Agreement, or (iii) give rise to an imposition
of any Lien, charge, security interest or encumbrance of any nature whatsoever
upon any of the assets of Parent.
4. When issued, the shares of Parent Common Stock to be issued
upon completion of the Exchange Offer will be duly authorized, validly issued,
fully paid and nonassessable and free and clear of all Liens and preemptive
rights. The certificates representing such shares will be in due and proper
form.
5. When issued, the Senior Notes to be issued in connection
with the Exchange Offer will be legal, valid and binding obligations of Parent.
The Senior Notes will be in due and proper form in accordance with the terms of
the Senior Notes Indenture. The Senior Notes will be notes issued under the
Senior Notes Indenture and shall be entitled to the rights and privileges set
forth therein.
D - 4
<PAGE>
V. Representations and Warranties of the Primary Holders
As an inducement to Parent to enter into this Letter
Agreement, each Primary Holder severally and not jointly represents and warrants
to Parent as follows:
1. Such Primary Holder holds the principal amount of Discount
Notes set forth opposite such Primary Holder's name on Exhibit A attached
hereto. Such Discount Notes have not been assigned and are not subject to any
Liens.
2. Such Primary Holder will have all requisite corporate power
and authority to execute, deliver and perform its obligations under this Letter
Agreement. The execution, delivery and performance of this Letter Agreement and
the consummation of the transactions contemplated hereby have been duly approved
and authorized by all requisite corporate action of such Primary Holder and such
approval has not been modified or rescinded. No further corporate actions or
approval on the part of such Primary Holders are required under applicable law
for the consummation of the transactions contemplated hereby. This Letter
Agreement has been duly executed and delivered by such Primary Holder and
constitutes the legal, valid and binding obligation of such Primary Holder,
enforceable against such Primary Holder in accordance with its terms, subject to
the effect of any applicable bankruptcy insolvency (including, without
limitation, all laws relating to fraudulent transfers), reorganization,
moratorium or similar laws affecting creditors rights generally and subject to
the effect of general principles of equity (regardless of whether considered in
a proceeding at law or in equity).
VI. Conditions
The obligations of each party hereto to consummate the
transactions contemplated by this Letter Agreement are conditioned upon the
consummation of the Merger.
D - 5
<PAGE>
If the foregoing is in accordance with your understanding of
our agreement, please sign in the space below, whereupon this letter and your
acceptance shall represent a binding agreement among Parent and the Primary
Holders.
MPOWER COMMUNICATIONS CORP.
(A/K/A MGC COMMUNICATIONS, INC.)
By:
-------------------------------------
Name: S. Gregory Clevenger
Title: Senior Vice President - Corporate
Development
EC PRIMARY L.L.C
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
QUANTUM EMERGING GROWTH
PARTNERS C.V.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
RAVICH REVOCABLE TRUST OF 1989
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
THE RAVICH CHILDREN PERMANENT
TRUST
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
D - 6
<PAGE>
U.S. BANCORP LIBRA
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
TGV PRIMARY INVESTORS LLC
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
D - 7
<PAGE>
EXHIBIT A
- --------------------------------------------------------------------------------
Name Principal Amount of Discount Notes
- --------------------------------------------------------------------------------
E.C. Primary LLC $50,445,292
- --------------------------------------------------------------------------------
Quantum Emerging Growth Partners C.V. $20,560,640
- --------------------------------------------------------------------------------
Ravich Revocable Trust of 1989 $2,916,742
- --------------------------------------------------------------------------------
The Ravich Children Permanent Trust $398,462
- --------------------------------------------------------------------------------
U.S. Bancorp Libra $1,593,848
- --------------------------------------------------------------------------------
D - 8
<PAGE>
ANNEX E - SECTION 262 OF THE DGCL
<PAGE>
Annex E
SECTION 262 OF THE DGCL
APPRAISAL RIGHTS
262 APPRAISAL RIGHTS. (a) Any stockholder of a corporation of
this State who holds shares of stock on the date of the making of a demand
pursuant to subsection (d) of this section with respect to such shares, who
continuously holds such shares through the effective date of the merger or
consolidation, who has otherwise complied with subsection (d) of this section
and who has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to ss.228 of this title shall be entitled to an
appraisal by the Court of Chancery of the fair value of the stockholder's shares
of stock under the circumstances described in subsections (b) and (c) of this
section. As used in this section, the word "stockholder" means a holder of
record of stock in a stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is ordinarily
meant by those words and also membership or membership interest of a member of a
nonstock corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any
class or series of stock of a constituent corporation in a merger or
consolidation to be effected pursuant to ss.251 (other than a merger effected
pursuant to ss.251(g) of this title), ss.252, ss.254, ss.257, ss.258, ss.263 or
ss.264 of this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or consolidation,
were either (i) listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc. or (ii) held of record by more
than 2,000 holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation surviving a
merger if the merger did not require for its approval the vote of the
stockholders of the surviving corporation as provided in subsection (f) of
ss.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the shares of any
class or series of stock of a constituent corporation if the holders thereof are
required by the terms of an agreement of merger or consolidation pursuant to
ss.ss.251, 252, 254, 257, 258, 263 and 264 of its title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system
E - 1
<PAGE>
by the National Association of Securities Dealers, Inc. or held of record by
more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this paragraph;
or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under ss.253 of this title is not owned
by the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of
incorporation that appraisal rights under this section shall be available for
the shares of any class or series of its stock as a result of an amendment to
its certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or substantially all
of the assets of the corporation. If the certificate of incorporation contains
such a provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the record date
for such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall include
in such notice a copy of this section. Each stockholder electing to demand the
appraisal of such stockholder's shares shall deliver to the corporation, before
the taking of the vote on the merger or consolidation, a written demand for
appraisal of such stockholder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not constitute
such a demand. A stockholder electing to take such action must do so by a
separate written demand as herein provided. Within 10 days after the effective
date of such merger or consolidation, the surviving or resulting corporation
shall notify each stockholder of each constituent corporation who has complied
with this subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to
ss.228 or ss.253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval of
the
E - 2
<PAGE>
merger or consolidation and that appraisal rights are available for any or all
shares of such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
E - 3
<PAGE>
(f) Upon the filing of any such petition by a stockholder,
service of a copy thereof shall be made upon the surviving or resulting
corporation, which shall within 20 days after such service file in the office of
the Register in Chancery in which the petition was filed a duly verified list
containing the names and addresses of all stockholders who have demanded payment
for their shares and with whom agreements as to the value of their shares have
not been reached by the surviving or resulting corporation. If the petition
shall be filed by the surviving corporation, the petition shall be accompanied
by such a duly verified list. The Register in Chancery, if so ordered by the
Court, shall give notice of the time and place fixed for the hearing of such
petition by registered or certified mail to the surviving or resulting
corporation and to the stockholders shown on the list at the addresses therein
stated. Such notice shall also be given by 1 or more publications at least 1
week before the day of the hearing, in a newspaper of general circulation
published in the City of Wilmington, Delaware or such publication as the Court
deems advisable. The forms of the notices by mail and by publication shall be
approved by the Court, and the costs thereof shall be borne by the surviving or
resulting corporation.
(g) At the hearing on such petition, the Court shall determine
the stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders who have
demanded an appraisal for their shares and who hold stock represented by
certificates to submit their certificates of stock to the Register in Chancery
for notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
(h) After determining the stockholders entitled to an
appraisal, the Court shall appraise the shares, determining their fair value
exclusive of any element of value arising from the accomplishment or expectation
of the merger or consolidation, together with a fair rate of interest, if any,
to be paid upon the amount determined to be the fair value. In determine such
fair value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest, which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of the
proceeding. Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection (f)
of this section and who has submitted such stockholder's certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that such stockholder is not entitled
to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of
the shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple or
compound, as the Court may direct. Payment shall be so made to each such
stockholder, in the case of holders of uncertificated stock forthwith, and the
case of holders of shares represented by certificates upon the surrender to the
corporation of the certificates representing such stock. The Court's decree may
be enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of any
state.
E - 4
<PAGE>
(j) The costs of the proceeding may be determined by the Court
and taxed upon the parties as the Court deems equitable in the circumstances.
Upon application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded appraisal rights as provided in
subsection (d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on the stock
(except dividends or other distributions payable to stockholders of record at a
date which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal of
such stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to
which the shares of such objecting stockholders would have been converted had
they assented to the merger or consolidation shall have the status of authorized
and unissued shares of the surviving or resulting corporation. (Last amended by
Ch. 339, L. '98, eff. 7-1-98.)
E - 5
<PAGE>
ANNEX F - CERTAIN AUDITED AND
UNAUDITED FINANCIAL STATEMENTS OF PRIMARY NETWORK
<PAGE>
Annex F
PRIMARY NETWORK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
PRIMARY NETWORK HOLDINGS, INC. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Unaudited Consolidated balance sheets as of September 30, 1999 and
December 31, 1999 (unaudited) F-1 to F-2
Unaudited Consolidated statements of operations F-3
for the quarter ended December 31, 1998 and 1999
Unaudited statements of cash flows F-4 to F-5
for the quarter ended Decmeber 31, 1998 and 1999
Notes to the unaudited consolidated financial statements F-6 to F-13
PRIMARY NETWORK HOLDINGS, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD
JUNE 1, 1999 TO SEPTEMBER 30, 1999
Report of Independent Auditors F-16
Consolidated Balance Sheet F-17
Consolidated Statement of Operations F-18
Consolidated Statement of Stockholders' Equity F-19
Consolidated Statement of Cash Flows F-20
Notes to Consolidated Financial Statements F-22 to F-47
CDM ON-LINE, INC. FINANCIAL STATEMENTS FOR THE PERIOD JANUARY 1,
1999 TO MAY 31, 1999
Report of Independent Auditors F-50
Balance Sheet F-51
Statement of Operations F-52
Statement of Stockholders' Equity F-53
Statement of Cash Flows F-54
Notes to Financial Statements F-55 to F-68
<PAGE>
CDM ON-LINE, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER
31, 1997 AND 1998
Page
----
Report of Independent Auditors F-71
Balance Sheets F-72
Statements of Operations F-73
Statements of Stockholders' Deficit F-74
Statements of Cash Flows F-75
Notes to Financial Statements F-76 to F-87
<PAGE>
Primary Network Holdings, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1999
September 30, 1999 (Unaudited)
----------------------------------------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 26,712,416 $ 15,644,224
Investments 5,076,212 -
Accounts receivable, less allowance for doubtful accounts
of $ 630,920 at September 30, 1999 and $1,014,009 at
December 31, 1999 963,512 2,238,733
Due from affiliates 1,052,505 995,807
Inventory 105,886 129,610
Other current assets 923,385 1,603,446
----------------------------------------------
Total current assets 34,833,916 20,611,820
Restricted cash 1,000,000 1,000,000
Property and equipment, net 8,900,931 20,361,875
Refundable capital lease deposit with affiliate 707,660 707,660
Debt issuance costs, net of accumulated amortization of
$160,582 at September 30, 1999 and $281,020 at December 3,211,658 3,091,221
31, 1999
Intangible assets, net 13,110,252 18,628,241
----------------------------------------------
$ 61,764,417 $ 64,400,817
==============================================
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 2,322,537 $ 4,112,501
Accrued expenses 3,130,130 8,243,755
Unearned revenues 1,069,696 1,171,315
Current maturities of capital lease obligations 1,137,019 1,626,112
Note payable 16,614 462,928
Due to affiliates 158,376 -
----------------------------------------------
Total current liabilities 7,834,372 15,616,611
Capital lease obligations, less current maturities 1,280,252 1,906,408
Convertible note payable 1,000,000 1,750,000
Senior subordinated discount note 48,837,310 50,687,106
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Stockholders' equity (deficit):
Preferred Stock, $.001 par value, 20,000,000 shares
authorized
Series A preferred stock, 2,306,765 shares issued and
outstanding 494,375 494,375
Series B preferred stock, 1,500,000 shares designated,
850,000 shares issued and outstanding - 170,000
Deferred stock compensation - (162,917)
Common stock, $.001 par value, 80,000,000 shares
authorized, 63,600,815 shares issued 63,601 63,601
Additional paid-in capital 14,496,596 14,496,596
Accumulated deficit (12,242,089) (20,620,963)
----------------------------------------------
2,812,483 (5,559,308)
----------------------------------------------
$ 61,764,417 $ 64,400,817
==============================================
</TABLE>
See notes to unaudited consolidated financial statements.
F-2
<PAGE>
Primary Network Holdings, Inc.
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three months ended
December 31, 1998 December 31, 1999
(Predecessor) (Successor)
--------------------------------------------
<S> <C> <C><
Revenues:
Access revenues $885,017 $2,631,621
Communication revenues - 1,143,165
Retail revenues 220,746 242,177
Other revenues 203,866 236,550
--------------------------------------------
1,309,629 4,253,513
Costs and expenses:
Costs of access revenues 337,216 1,075,386
Cost of communication revenues - 1,165,203
Cost of retail revenues 146,925 97,296
Costs of other revenues 163,925 207,052
Operations and customer support 193,032 1,595,724
Sales and marketing 237,028 1,342,581
General and administrative 420,720 2,392,719
Retail store expenses 298,308 189,861
Depreciation and amortization 92,192 2,813,809
--------------------------------------------
1,889,346 10,879,631
--------------------------------------------
Loss from operations (579,717) (6,626,118)
Other income (expense):
Interest expense - affiliates (18,909) -
Interest expense (422) (2,094,787)
Other, net (27,453) 342,031
--------------------------------------------
Loss from continuing operations (626,501) (8,378,874)
Income from operations of discontinued Web development
division 57,106 -
--------------------------------------------
Loss before income taxes (569,395) (8,378,874)
Provision for income taxes - -
--------------------------------------------
Net loss $ (569,395) $ (8,378,874)
============================================
</TABLE>
See notes to unaudited consolidated financial statements.
F-3
<PAGE>
Primary Network Holdings, Inc.
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three months ended
December 31, December 31,
1998 1999
(Predecessor) (Successor)
--------------------------------------------
<S> <C> <C>
Operating activities
Net loss $(569,395) $(8,378,874)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 92,192 2,813,809
Amortization of debt issuance costs - 120,438
Allowance for doubtful accounts 14,692 387,471
Accretion of discount on senior subordinated
debt - 1,849,796
Amortization of discount on investment - (48,788)
Stock based compensation expense 46,157 7,083
Changes in operating assets and liabilities:
Accounts receivable 75,189 (1,510,404)
Due from affiliates (203,164) 56,698
Inventory 14,041 (23,724)
Other current assets (38,226) (668,631)
Accounts payable 66,531 1,635,906
Accrued expenses 102,697 (86,704)
Unearned revenues 42,205 (118,969)
--------------------------------------------
Net cash used in operating activities (357,081) (3,964,893)
Investing activities
Sale of held to maturity security - 5,125,000
Advances to affiliates (152,172) -
Purchases of property and equipment, net of
accrued expenses (90,885) (5,218,090)
Acquisition of Information Services Technologies, Inc. - (591,006)
Acquisition of Business Product Systems Internet, Inc. - (700,112)
Acquisition of UNI Networking, Inc. - (345,301)
Acquisition of GlobalVision Systems, Inc., net of cash
acquired - (3,102,445)
Acquisition of Digital Internet Access Inc., net of cash
acquired - (1,417,771)
Acquisition of Harvest Communications, Inc. - (50,000)
--------------------------------------------
Net cash used in investing activities (243,057) (6,299,725)
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Financing activities
Principal payments of obligations under capital
lease
- (645,198)
Net proceeds under line of credit 20,000 -
Purchase of common stock held in treasury (33,255) -
Due to affiliates 634,226 (158,376)
Proceeds from issuance of common stock 279,058 -
--------------------------------------------
Net cash provided by (used in) financing activities 900,029 (803,574)
--------------------------------------------
Net increase (decrease) in cash and cash
equivalents
299,891 (11,068,192)
Cash and cash equivalents at beginning of period 689 26,712,416
--------------------------------------------
Cash and cash equivalents at end of period $ 300,580 $ 15,644,224
============================================
</TABLE>
F-5
<PAGE>
PRIMARY NETWORK HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. Nature of Business and Basis of Presentation
Nature of Business
Primary Network Holdings, Inc. (the Company) is headquartered in St. Louis,
Missouri, provides full-service access to the Internet for corporate and
residential users primarily in Missouri and Kansas. The Company also is a
reseller of basic local telecommunications services, dedicated non-switched
local exchange telecommunications services, and intrastate interexchange
telecommunications services in Missouri. The basic local service is classified
as competitive by the State of Missouri Public Service Commission (PSC) and is
provided in portions of Missouri that are currently served primarily by
Southwestern Bell Telephone Company (SWBT). Furthermore, the Company also serves
as an authorized agent of Southwestern Bell Mobile Systems and operates cellular
and other wireless communication products retail stores in the St. Louis
metropolitan area. Billings are due upon receipt.
Basis of Presentation
The unaudited consolidated financial statements of Primary Network Holdings,
Inc., the successor company, and CDM On-Line, Inc., the predecessor company,
have been prepared in accordance with generally accepted accounting principles
for interim financial information (refer to footnotes 1 and 2 in the September
30, 1999 audited financial statements of the Company for further explanation of
the organization and basis of presentation and initial formation and
capitalization of the Company). Accordingly, these interim financial statements
do not include all of the information and notes required by generally accepted
accounting principles for complete financial statements, and, therefore, should
be read in conjunction with the Company's audited financial statements for the
four months ended September 30, 1999, contained in this Prospectus. In the
opinion of management, all adjustments (consisting only of normal recurring
items) considered necessary for a fair presentation have been included. The
results of operations for the three months ended December 31, 1999, are not
necessarily indicative of the results that may be expected for the year ended
September 30, 2000.
F-6
<PAGE>
PRIMARY NETWORK HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
2. Inventory
Inventory consists of cellular and other wireless communication products and
accessories and is stated at the lower of cost (specific identification basis)
or market.
3. Property and Equipment
Property and equipment consist of the following at September 30, 1999 and
December 31, 1999:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1999
------------------------------------------
<S> <C> <C>
Computer equipment $ 4,465,458 $ 6,441,308
Software 478,574 698,167
Furniture, fixtures, and office equipment 680,884 793,849
Capitalized collocation costs 150,236 4,342,291
Land, building, and leasehold improvements 285,552 480,219
Vehicles 71,348 71,348
------------------------------------------
6,132,052 12,827,182
Less accumulated depreciation and amortization (1,881,830) (2,459,256)
------------------------------------------
4,250,222 10,367,926
Construction in progress 4,650,709 9,993,949
------------------------------------------
$ 8,900,931 $ 20,361,875
==========================================
</TABLE>
4. Intangible Assets
Intangible assets consist of the following at September 30, 1999 and December
31, 1999:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1999
------------------------------------------
<S> <C> <C>
Acquired customer list $ 2,771,783 $ 5,460,083
Goodwill 11,631,661 16,733,735
------------------------------------------
14,403,444 22,193,818
Less accumulated amortization (1,293,192) (3,565,577)
------------------------------------------
$ 13,110,252 $ 18,628,241
=========================================
</TABLE>
F-7
<PAGE>
PRIMARY NETWORK HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
5. Accrued Liabilities
Accrued liabilities consist of the following at September 30, 1999 and December
31, 1999:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1999
----------------------------------------
<S> <C> <C>
Accrual for equipment acquired $ 1,836,572 $ 6,369,305
Accrued payroll and related expenses 366,933 550,076
Acquisition related holdback accrual 130,000 751,355
Other accrued liabilities 796,625 573,019
---------------------------------------
$ 3,130,130 $ 8,243,755
=======================================
</TABLE>
6. Segment Information
The Company has three reportable segments, Internet, Retail, and Communications,
which are separate operating units that offer different products and services
and are managed accordingly. Performance of each segment is evaluated by
management based on income (loss) before income taxes. The corporate and
eliminations segment includes corporate assets, principally consisting of cash
and cash equivalents, investments and debt issuance costs, corporate activities
and the elimination of intersegment transactions. In addition, as a result of
the initial formation and capitalization of the Company as of June 1, 1999, the
Company adjusted its segment reporting structure whereby interest expense is no
longer allocated to its three reportable segments.
The Internet segment provides full service access to the Internet for corporate
and residential customers including dial-up and dedicated services and
activities related to setup and installation, selling equipment, and software.
The Retail segment sells cellular and other wireless communication products,
including phones, pagers, and related accessories. The Communications segment,
which was established June 1, 1999, provides facilities-based and resold basic
local telecommunications service, including dedicated/non-switched local
exchange services, and intrastate interexchange services.
The following segment information is as of December 31 or for the three months
then ended:
F-8
<PAGE>
PRIMARY NETWORK HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
6. Segment Information (continued)
1998 (Predecessor):
- -------------------
<TABLE>
<CAPTION>
Internet Retail Total
-----------------------------------------------
<S> <C> <C> <C>
Revenues from external customers $1,088,883 $220,746 $1,309,629
Intersegment revenues - - -
Depreciation and amortization 88,467 3,725 92,192
Interest expense 16,073 3,258 19,331
Loss from continuing operations (395,028) (231,473) (626,501)
Income from discontinued operation - Web
Development 57,106 - 57,106
Loss before income taxes (337,922) (231,473) (569,395)
Segment assets 1,123,687 540,241 1,663,928
Capital expenditures, net of accrued expenses 86,635 4,250 90,885
</TABLE>
1999 (Successor):
- -----------------
<TABLE>
<CAPTION>
Corporate
and
Internet Retail Communications Eliminations Total
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues from
external
customers $2,868,171 $242,177 $1,143,165 - $4,253,513
Intersegment
Revenues 765 44,649 244,118 (289,532) -
Depreciation
and
amortization 1,866,138 8,947 890,209 48,515 2,813,809
Interest expense - - - 2,094,787 2,094,787
Loss before
income taxes (1,898,088) (52,314) (2,697,817) (3,730,655) (8,378,874)
Segment assets 20,192,172 360,552 22,502,260 21,345,833 64,400,817
Capital
expenditures,
net of
accrued expenses 39,939 536 4,531,002 646,613 5,218,090
</TABLE>
F-9
<PAGE>
PRIMARY NETWORK HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
7. Acquisitions
In the three month period ended December 31, 1999, the Company made the
following acquisitions:
On October 1, 1999, the Company purchased substantially all of the assets of
Information Systems Technologies, Inc. for approximately $591,000, net of
liabilities assumed.
On October 6, 1999, the Company purchased substantially all of the assets of
Business Products Systems Internet, Inc. for approximately $700,000, net of
liabilities assumed.
On October 13, 1999, the Company purchased substantially all of the assets of
UNI Networking Inc. for approximately $345,000, net of liabilities assumed.
On October 20, 1999, the Company purchased all of the outstanding common stock
of GlobalVision Systems, Inc. for approximately $3,102,000, net of cash acquired
and liabilities assumed.
On November 1, 1999, the Company purchased all of the outstanding common stock
of Harvest Telecom, Inc. for approximately $50,000.
On November 10, 1999, the Company purchased all of the outstanding common stock
of Digital Internet Access, Inc. for approximately $1,418,000, net of cash
acquired and liabilities assumed.
The above acquisitions were accounted for under the purchase method of
accounting, and accordingly, the purchase prices were allocated to assets
acquired and liabilities assumed based upon their estimated fair values at the
dates of acquisition. The customer lists were valued at $200 per subscriber
acquired, which represents the estimated fair value of such subscribers based
upon recent transactions in the ISP industry. Included in the purchase prices
listed above are legal and acquisition costs of approximately $32,600. For those
businesses acquired, the results of operations are included in the Company's
consolidated statement of operations from the dates of acquisition.
F-10
<PAGE>
PRIMARY NETWORK HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
The combined historical results for the acquisitions listed above were not
deemed to be material and thus, pro-forma financial information was not
presented for the periods disclosed.
8. Secondment Agreement
On November 23, 1999, the Company entered into a Secondment Agreement with an
investor to obtain certain services to be provided by an employee of the
investor. Under the terms of the agreement, the Company is required to pay
$17,500 per month for the services, including out-of-pocket expenses.
Furthermore, the seconded employee was issued 680,000 shares of Series B
preferred stock which vests in eight equal quarterly installments over a
two-year period and warrants with an exercise price of $1.52 per share to
purchase an additional 520,000 shares of Series B preferred stock which vest in
three equal annual installments. Furthermore, the investor was issued 170,000
shares of Series B preferred stock and was granted warrants with an exercise
price of $1.52 to purchase an additional 130,000 shares of Series B preferred
stock, both with the same vesting terms as the seconded employee described
above. All of the above issuances and grants vest immediately upon the
occurrence of certain events described in the agreement, including a change in
control. The Company will recognize the compensation expense related to these
transactions ratably over the vesting period. Finally, the investor is entitled
to receive a fee, payable immediately, in the event the Company consummates
certain transactions outlined in the agreement prior to June 1, 2000, including
a change in control, obtaining senior debt from a financial institution, or
issuing additional subordinated debt or equity securities.
9. Subsequent Events
Sale Leaseback
On March 31, 2000, the Company entered into a sale leaseback agreement, whereby
the Company sold collocation equipment with a book value of approximately
$8,000,000 and subsequently entered into a capital lease for approximately
$9,400,000, including the financing of approximately $900,000 in equipment
maintenance agreements. The assets under the capital lease are recorded at the
lower of the present value of the minimum lease payments or the fair value of
the equipment. The gain resulting from this transaction of approximately
$500,000 is being amortized over the term of the lease. Under the terms of the
lease, the Company is required to make six monthly payments of approximately
$106,000 and then thirty monthly payments of approximately $340,000.
F-11
<PAGE>
PRIMARY NETWORK HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
In addition to the equipment being financed under the lease, the Company granted
the lessor an additional security interest in substantially all tangible and
intangible assets of the Company. The lessor has provided a contingent clause in
the agreement for the release of the additional security upon the Company
obtaining unrestricted cash equity proceeds in the amount of $50,000,000 or
greater.
Lease Commitment
On April 15, 2000 the Company entered into an agreement for the lease of a new
office building. The term of the agreement is five years with total annual rent
of approximately $1,200,000.
Pending Transaction
On April 17, 2000, the Company signed an agreement and plan of merger (merger
agreement) with Mpower Communications Corp. (A/K/A MGC Communications, Inc.)
In connection with the consummation of the merger agreement, the following will
occur:
(i) The Company's stockholders will exchange their shares in the Company
for 1,350,000 shares of common stock of Mpower Communications Corp.
(Mpower). Each outstanding share of the Company's common stock and
preferred stock will be converted into .02022 shares of Mpower common
stock.
(ii) All of the Company's stock options outstanding under the Company's
stock option plan shall continue to have, and be subject to, the same
terms and conditions as set forth in the Company's stock option plan
and the agreements pursuant to which such Company stock options were
issued, except that each Company stock option shall be exercisable for
.02022 shares of Mpower common stock and the price per share will be
adjusted accordingly.
F-12
<PAGE>
PRIMARY NETWORK HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
DECEMBER 31, 1999
(iii) The Company's 4,476,423 detachable non-callable warrants to the
Investors that entitle the holders to purchase common shares of the
Company at a price of $3.385 per share shall continue to be subject to
the same terms and conditions, except that each warrant shall be
exercisable for .02022 shares of Mpower common stock and the price per
share will be adjusted accordingly.
(iv) Mpower will assume approximately $80,000,000 of net liabilities of the
Company, a portion of which will be swapped for additional high-yield
bonds to be issued under Mpower's recent high-yield financing
indenture. The holders of the swapped debt will also receive 50,000
shares of Mpower common stock.
(v) Mpower will become the sole stockholder of the Company.
Note Payable
On April 27, 2000 the Company issued a $10,000,000 senior promissory note
(senior note) to Mpower due the earlier of April 17, 2001, upon a change of
control of the Company other than the pending transaction discussed above, or
upon the event of default, as defined. Interest accrues at 15 percent per annum
until the maturity date. After the maturity date, interest accrues at 18 percent
per annum until the senior note is paid in full. At any time prior to maturity
of the senior note, the unpaid principal amount of the senior note together with
any accrued but unpaid interest may be prepaid in whole or in part as long as
the Company has provided at least 15 business day's notice to Mpower.
Due to the issuance of this senior note, the Company was in violation of a
covenant included in the Note and Purchase Agreement dated June 1, 1999 related
primarily to limitations of indebtedness. The holders of Notes waived their
right to call the debt as well as this covenant violation as of April 27, 2000.
F-13
<PAGE>
Consolidated Financial Statements
Primary Network Holdings, Inc.
For the period June 1, 1999 to September 30, 1999
with Report of Independent Auditors
F-14
<PAGE>
Primary Network Holdings, Inc.
Consolidated Financial Statements
For the period June 1, 1999 to September 30, 1999
Contents
Report of Independent Auditors..............................................F-16
Consolidated Financial Statements
Consolidated Balance Sheet..................................................F-17
Consolidated Statement of Operations........................................F-18
Consolidated Statement of Stockholders' Equity..............................F-19
Consolidated Statement of Cash Flows........................................F-20
Notes to Consolidated Financial Statements..................................F-22
F-15
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Primary Network Holdings, Inc.
We have audited the accompanying consolidated balance sheet of Primary Network
Holdings, Inc. as of September 30, 1999 and the related consolidated statements
of operations, stockholders' equity, and cash flows for the period June 1, 1999
to September 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Primary
Network Holdings, Inc. at September 30, 1999 and the consolidated results of its
operations and its cash flows for the period June 1, 1999 to September 30, 1999,
in conformity with accounting principles generally accepted in the United
States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As more fully described in
Note 1, the Company has incurred significant operating losses and negative cash
flows from operations. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The September 30, 1999
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Ernst & Young LLP
February 11, 2000, except for Note 16, as to
which the date is April 27, 2000
St. Louis, Missouri
F-16
<PAGE>
Primary Network Holdings, Inc.
Consolidated Balance Sheet
September 30, 1999
Assets
Current assets:
Cash and cash equivalents $ 26,712,416
Investments 5,076,212
Accounts receivable, less allowance for doubtful
accounts of $630,920 963,512
Due from affiliates 1,052,505
Inventory 105,886
Prepaid expenses and other current assets 923,385
----------------
Total current assets 34,833,916
Restricted cash 1,000,000
Property and equipment, net 8,900,931
Refundable capital lease deposit with affiliate 707,660
Debt issuance costs, net of accumulated amortization
of $160,582 3,211,658
Intangible assets, net 13,110,252
----------------
$ 61,764,417
================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,322,537
Accrued expenses 3,130,130
Unearned revenues 1,069,696
Current maturities of capital lease obligations 1,137,019
Note payable 16,614
Due to affiliates 158,376
----------------
Total current liabilities 7,834,372
Capital lease obligations, less current maturities 1,280,252
Convertible note payable 1,000,000
Senior subordinated discount notes 48,837,310
Stockholders' equity:
Preferred stock, $.001 par value, 20,000,000 shares
authorized
Series A, 2,306,765 shares issued and outstanding 494,375
Common stock, $.001 par value, 80,000,000 shares
authorized, 63,600,815 shares issued and outstanding 63,601
Additional paid-in capital 14,496,596
Accumulated deficit (12,242,089)
----------------
2,812,483
----------------
$ 61,764,417
================
See accompanying notes.
F-17
<PAGE>
Primary Network Holdings, Inc.
Consolidated Statement of Operations
For the period June 1, 1999 to September 30, 1999
Revenues:
Access revenues $ 2,712,058
Communications revenues 850,367
Retail revenues 350,715
Other revenues 168,997
---------------------
4,082,137
Costs and expenses:
Costs of access revenues 947,293
Costs of communications revenues 903,846
Costs of retail revenues 141,734
Costs of other revenues 109,700
Operations and customer support 1,595,725
Sales and marketing 1,342,581
General and administrative 2,046,290
Retail store expenses 275,554
Depreciation and amortization 1,766,901
Impairment charge 254,132
---------------------
9,383,756
---------------------
Loss from operations (5,301,619)
Other income (expense):
Interest expense - affiliates (118,507)
Interest expense (2,582,804)
Interest income - affiliates 30,301
Other income, net 663,926
---------------------
(2,007,084)
---------------------
Loss before income taxes (7,308,703)
Provision for income taxes -
---------------------
Net loss $ (7,308,703)
=====================
See accompanying notes.
F-18
<PAGE>
Primary Network Holdings, Inc.
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Series A Preferred Additional
Stock Common Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 1, 1999 - $ - - $ - $ - $ -
Issuance of stock in connection with
the acquisition of CDM Online, Inc. - - 24,632,359 24,632 6,655,497 (4,933,386)
Issuance of stock in connection with
the acquisition of BroadSpan
Communications, Inc. - - 7,085,664 7,086 1,511,480 -
Issuance of stock in initial
capitalization (See Note 2) 2,306,765 494,375 31,882,792 31,883 6,329,619 -
Net loss - - - - - (7,308,703)
--------------------------------------------------------------------------------------
Balance at September 30, 1999 2,306,765 $ 494,375 63,600,815 $ 63,601 $ 14,496,596 $(12,242,089)
======================================================================================
</TABLE>
See accompanying notes.
F-19
<PAGE>
Primary Network Holdings, Inc.
Consolidated Statement of Cash Flows
For the period June 1, 1999 to September 30, 1999
Operating activities
Net loss $ (7,308,703)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,766,901
Amortization of debt issue costs 160,582
Allowance for doubtful accounts 305,692
Accretion of discount on senior subordinated debt 2,392,255
Amortization of discount on investment (76,667)
Impairment charge 254,132
Gain on disposal of fixed assets (75,000)
Changes in operating assets and liabilities:
Accounts receivable (178,375)
Due from affiliates (1,126,900)
Inventory (9,560)
Prepaid expenses and other current assets (532,987)
Accounts payable (209,308)
Accrued expenses 825,371
Due to affiliates (348,488)
Unearned revenues 105,706
-------------
Net cash used in operating activities (4,055,349)
Investing activities
Increase in restricted cash (1,000,000)
Purchase of held-to-maturity security (4,999,545)
Cash acquired in acquisition of CDM On-Line, Inc. 73,938
Cash acquired in acquisition of BroadSpan Communications, Inc. 109,762
Acquisition of InLink Communications Company (4,738,848)
Acquisition of Q-Networks Inc., net of cash acquired (3,980,795)
Acquisition of CySource, Inc. (593,502)
Additional costs incurred in acquisitions made by predecessor
in prior periods (34,726)
Purchase of property and equipment, net of accounts payable (3,772,056)
-------------
Net cash used in investing activities (18,935,772)
F-20
<PAGE>
Primary Network Holdings, Inc.
Consolidated Statement of Cash Flows (continued)
For the period June 1, 1999 to September 30, 1999
Financing activities
Payments of equity and debt issuance costs (3,071,307)
Principal payments of obligations under capital leases (222,350)
Proceeds from issuance of senior subordinated discount notes 46,445,055
Proceeds from issuance of common stock 6,554,945
Principal payments under note payable (2,806)
-------------
Net cash provided by financing activities 49,703,537
-------------
Net increase in cash and cash equivalents 26,712,416
Cash and cash equivalents at June 1, 1999 -
-------------
Cash and cash equivalents at September 30, 1999 $ 26,712,416
=============
Noncash investing and financing transactions:
Note payable issued to seller in acquisition of
Q-Networks Inc. $ 1,000,000
=============
Capital leases entered into $ 119,311
=============
See accompanying notes.
F-21
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
1. Organization and Basis of Presentation
Primary Network Holdings, Inc., a Delaware corporation, (PNH or the Company) was
incorporated on March 3, 1999 for the purpose of combining two affiliated
entities, CDM On-Line, Inc., d/b/a/ Primary Network Internet, Inc. (PNI), an
Internet service provider (ISP), and BroadSpan Communications, Inc., d/b/a/
Primary Network Communication, Inc. (PNC), a competitive local exchange carrier
(CLEC). In an April 1999 joint stockholders meeting, the stockholders of PNI and
PNC voted to approve an Agreement & Plan of Reorganization, pursuant to which
the respective stockholders of each company would exchange their current
ownership interests for shares of common stock in the Company effective the
close of business on May 31, 1999 (the Exchange) (see Note 3). Subsequent to the
Exchange, PNI and PNC continued as wholly owned subsidiaries of the Company.
The Company was in the development stage for the period from March 3, 1999 (date
of inception) to June 1, 1999. Accordingly, the Company had no assets,
liabilities, or financial activity prior to June 1, 1999.
Pursuant to the requirements of the Securities and Exchange Commission's Staff
Accounting Bulletin No. 97, which was issued and became effective July 31, 1996,
although the Company is the legal acquiror of both entities, PNI has been
designated as the acquirer of PNC and the predecessor of PNH for financial
reporting purposes. This designation was the result of the PNI stockholders
receiving the largest ownership interests in the combined corporation subsequent
to the Exchange. In addition, because PNI was treated as the acquirer in the
Exchange for financial accounting purposes, the Company's financial position on
June 1, 1999 reflected the historical cost basis of PNI. Furthermore, the
acquisition of PNC was accounted for as a purchase transaction, and accordingly,
purchase accounting adjustments, including the recognition of goodwill, were
recorded based on the fair value of the Company's common stock issued in the
Exchange at that date.
The accompanying consolidated financial statements of the Company for the period
June 1, 1999 to September 30, 1999 have been prepared on a going-concern basis
which contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business. The Company incurred a net
loss of $7,308,703 and had negative cash flows from operations of $4,055,349 for
the period June 1, 1999 to September 30, 1999. Additionally, the Company
continues to incur substantial capital expenditures as it relates to the
collocation build-out for its Digital Subscriber Line (DSL) service, which is
necessary for the Company to be able to offer its future core services, and has
continued to incur operating losses through the first four months of fiscal
2000. These two factors have resulted in a significant decrease
F-22
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
1. Organization and Basis of Presentation (continued)
in the Company's cash position subsequent to year-end. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Furthermore, the online services, Internet, and telecommunications markets are
highly competitive. The Company believes that existing competitors,
Internet-based services, other ISPs, Internet directory services, incumbent
local exchange carriers, other CLECs, and other telecommunications companies are
likely to enhance their service offerings, resulting in greater competition for
the Company. The competitive conditions could have the following effects:
require additional pricing programs, increase spending on marketing, limit the
Company's ability to expand its subscriber base, and result in increased
attrition in the existing subscriber base. The Company's viability as a going
concern is dependent upon management's operational and financing plans to
address these conditions which include, but are not limited to, obtaining
additional equity and debt financing, continuing investments in its
infrastructure to increase its efficiency and capacity to serve existing and
additional customers, and employing marketing and sales strategies to increase
its customer base. Although there can be no assurance that growth in the
Company's revenues or subscriber base will continue or that the Company will be
able to achieve or sustain profitability or positive cash flow, the Company
believes that these steps are appropriate and will enable the Company to
effectively reorganize its operations. Under current circumstances, the
Company's ability to continue as a going concern depends upon the successful
implementation of its plan. If the Company is unsuccessful in its efforts, it
may be necessary to undertake such other actions as may be appropriate to
preserve asset values. The accompanying consolidated financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
2. Initial Formation and Capitalization
As described in Note 1, effective the close of business on May 31, 1999, the
Company legally acquired PNI through the execution of an Agreement & Plan of
Reorganization, whereby all common stockholders of PNI exchanged each of their
shares for 16.67 shares of common stock in the Company. This transaction
resulted in the issuance of 24,632,359 common shares of the Company and occurred
simultaneously with the acquisition of PNC discussed below and, as mentioned
previously, resulted in PNI being designated as the accounting acquirer of PNC
and PNI being deemed to be the predecessor of PNH. Accordingly, the Company's
acquisition of PNI was accounted for using the carryover basis of PNI's assets,
liabilities, and retained earnings. As a result, no goodwill was recorded in
this acquisition. The net carrying value of PNI's assets as of the acquisition
date was $1,746,743.
F-23
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
2. Initial Formation and Capitalization (continued)
Also in connection with the Agreement & Plan of Reorganization, the Company
legally acquired PNC, whereby all common stockholders of PNC exchanged each of
their shares for 13.227 shares of common stock in the Company. This transaction
resulted in the issuance of 7,085,664 common shares of the Company and was
accounted for under the purchase method of accounting, based on the fair value
of the Company's common stock issued in the Exchange at the acquisition date of
$1,518,566, plus net liabilities assumed of $1,702,547 and acquisition costs of
$100,420. The purchase price allocation resulted in the Company recording total
goodwill associated with this transaction of $3,321,533.
The acquisitions of PNI and PNC have been structured as tax-free exchanges of
stock; therefore, the difference between the recognized fair value of the
acquired assets, including intangible assets, and their historical tax bases is
not deductible for income tax purposes.
On June 1, 1999, the Company entered into a Purchase Agreement with a syndicate
of investors (Investors) to obtain additional financing. Under this agreement,
the Company received cash proceeds of $53,000,000 and issued the following debt
and equity securities to the Investors: senior subordinated discount notes with
a face value of $84,473,948, 30,564,640 shares of common stock, and detachable
non-callable warrants to purchase 4,476,423 shares of common stock. The Company
determined the fair value of the common stock based upon an independent
valuation as of June 1, 1999. Accordingly, the Company allocated the proceeds
received among the debt, common stock, and warrants based on their respective
fair values at the time of issuance. The value attributable to the common stock
of approximately $6,550,000 was recorded as a debt discount to be charged to
interest expense over the life of the notes. The fair value of the warrants was
deemed insignificant on the date of grant, and thus only a nominal amount was
recorded as additional paid-in capital. This nominal value was also recorded as
a debt discount to be charged to interest expense over the life of the notes.
The balance of the proceeds of approximately $46,445,000 was allocated to the
notes.
Offering costs incurred in connection with the Purchase Agreement of
approximately $3,500,000, including legal costs, accounting fees, and financial
advisor fees, were recorded as debt issuance costs or as a reduction to
additional paid-in capital, based on the proportional allocation of proceeds
described above. Included in these offering costs were amounts equaling the fair
value at the transaction date of 2,306,765 shares of the Company's Series A
preferred stock and 1,318,152 shares of the Company's common stock which were
granted to certain investors who also acted as financial advisors and exclusive
placement agents in this transaction.
F-24
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
3. Summary of Significant Accounting Policies
Nature of Operations
The Company, which is headquartered in St. Louis, Missouri, provides
full-service access to the Internet for corporate and residential users
primarily in Missouri and Kansas. The Company also is a reseller of basic local
telecommunications services, dedicated non-switched local exchange
telecommunications services, and intrastate interexchange telecommunications
services in Missouri. The basic local service is classified as competitive by
the State of Missouri Public Service Commission (PSC) and is provided in
portions of Missouri that are currently served primarily by Southwestern Bell
Telephone Company (SWBT). Furthermore, the Company also serves as an authorized
agent of Southwestern Bell Mobile Systems and operates cellular and other
wireless communication products retail stores in the St. Louis metropolitan
area.
Consolidation
The consolidated financial statements of the Company include the accounts of all
of its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Accounting Period
Effective June 1, 1999, the Company changed its fiscal year-end from December
31, which was used by its predecessor, to September 30.
F-25
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
3. Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments with a maturity of
three months or less at the time of purchase to be cash equivalents.
Investments
Debt securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost, adjusted for amortization of premiums
and discounts to maturity. Such amortization and the interest on securities are
included in other income.
Property and Equipment
Property and equipment, including leasehold improvements, are stated at cost.
Costs related to software developed for internal use are capitalized in
accordance with AcSEC Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed For or Obtained For Internal Use. Depreciation is
calculated using the straight-line method over the estimated useful lives
ranging from 18 months to 15 years. Leasehold improvements are amortized over
the lesser of the related lease term or the useful life of the assets.
Capitalized collocation costs represent application fees, equipment costs, and
leasehold improvement costs related to the leasing of collocation space at SWBT.
These costs are necessary for the delivery of certain communication services,
primarily DSL service, to the Company's customers. The Company depreciates these
costs using a straight-line method over a three-year period beginning on the
date the service becomes available. At September 30, 1999, the Company has
incurred $4,650,709 of collocation costs which are under construction and
classified in construction in progress.
Equipment under capital leases is amortized over its related lease terms or its
estimated productive useful lives, depending on the criteria met in determining
a lease's qualification as a capital lease. Costs of repair and maintenance are
charged to expense as incurred.
Inventory
Inventory consists of cellular and other wireless communication products and
accessories and is stated at the lower of cost (specific identification basis)
or market.
F-26
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
3. Summary of Significant Accounting Policies (continued)
Customer Lists
The cost of customer lists acquired is being amortized over three years using
the straight-line method.
Goodwill
Goodwill, which represents the cost in excess of the fair market value of
identifiable net assets acquired, is being amortized using the straight-line
method over three years.
Impairment of Long-Lived Assets
Periodically, management determines whether any property or equipment or any
other assets have been impaired based on the criteria established in Statement
of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment
of Long-Lived Assets and Long-Lived Assets to Be Disposed Of. Based on these
criteria, customer lists and goodwill associated with assets acquired in a
business combination are included in impairment evaluations when events or
circumstances exist that indicate the carrying amount of those assets may not be
recoverable. During the four-month period ended September 30, 1999, the Company
recorded a $254,000 noncash charge to earnings related to the impairment
associated with the acquisition of the customer list and goodwill of CySource,
Inc. (see Note 4).
Stock Compensation
The Financial Accounting Standards Board's SFAS No. 123, Accounting for
Stock-Based Compensation, establishes the use of the fair value-based method of
accounting for stock-based employee compensation arrangements, under which
compensation cost is determined using the fair value of stock-based compensation
determined as of the grant date and is recognized over the periods in which the
related services are rendered. SFAS No. 123 also permits companies to elect to
continue using the intrinsic value accounting method specified in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB
25) and related interpretations to account for stock-based compensation. The
Company has elected to retain the intrinsic value-based method and will disclose
in its financial statements the pro forma effect of using the fair value-based
method to account for its stock-based compensation.
F-27
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
3. Summary of Significant Accounting Policies (continued)
Revenue Recognition
Access revenues: Internet customers are billed in advance for the periods for
which Internet services are provided. Internet access service plans range from
one month to one year. The Company defers recognition of revenue on these
advance billings and amortizes the amounts to revenue on a straight-line basis
as the services are provided.
Communications revenues services: Revenues from communications services are
recognized when customers use the services. Revenues billed in advance are
deferred and are recognized in the period in which the related services are
provided.
Retail revenues: These revenues consist primarily of retail product sales of
cellular and other wireless products, such as phones, pagers, and related
accessories. Such sales are recorded upon customer purchase. The Company also
generates revenues from activation commissions from cellular carriers for each
new cellular phone subscription sold by the Company. Revenue from such
commissions is recorded upon customer subscription. New subscription activation
commissions are fully refundable if the subscriber cancels service within a
certain minimum period of continuous active service (generally 180 days).
Customers generally sign a service agreement that requires a customer deposit
which is forfeited in case of early cancellation. At September 30, 1999, the
Company's allowance for accounts receivable includes an amount for estimated
cancellation losses, net of deposit forfeitures.
The Company generally receives monthly residual income from the cellular service
providers based on a percentage of actual phone usage by subscribers. Revenue
from residual income is recorded as the cellular service is provided. Revenue
from prepaid pager service is deferred and recognized over the period service is
provided, usually annually. Revenue from monthly installment pager service
contracts is recorded as earned.
Other revenues: Other revenues consist of setup and installation fees and
selling equipment and software. These revenues are recognized in the period in
which the service has been provided.
Costs of Revenues
Costs of access revenues primarily consist of telecommunications expenses
inherent in the network infrastructure, including fees paid for the lease of the
Company's backbone. Costs of communications revenues include local and long
distance services purchased
F-28
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
3. Summary of Significant Accounting Policies (continued)
Costs of Revenues (continued)
from SWBT and Qwest Communications Corporation (Qwest), respectively. Costs of
retail revenues consist of the costs of cellular and other wireless
communication products and accessories purchased for resale. Costs of other
revenues primarily consist of the costs of equipment and software purchased for
resale.
Advertising Costs
All advertising and promotion costs are expensed as incurred and totaled
$508,000 for the period June 1, 1999 to September 30, 1999.
Income Taxes
The provision for income taxes is computed using the liability method. Deferred
income taxes are provided to reflect the tax effects of temporary differences
between the book and tax basis of assets and liabilities. The primary difference
between the reported loss and taxable loss results from financial statement
accruals and reserves. The Company reported book and tax losses for the period
June 1, 1999 to September 30, 1999 and, therefore, has not recorded income tax
expense for the period then ended. Valuation allowances are established, when
appropriate, to reduce any deferred tax assets to the amount that will more
likely than not be realized.
For tax years prior to June 1, 1999, PNI was taxed under the provisions of
Subchapter S of the Internal Revenue Code (the Code). Under the Subchapter S
provisions of the Code, the stockholders of PNI included the Company's income or
loss in their personal income tax returns. Effective June 1, 1999, pursuant to
the Exchange, PNI's status as an S Corporation under the Code terminated, and it
became subject to state and federal corporate income taxes. Accordingly, the
Company established deferred tax assets and liabilities for PNI effective June
1, 1999. This calculation resulted in a net deferred tax asset position which
was fully reserved for by a valuation allowance.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents, investments,
accounts receivable, accounts payable, and senior subordinated discount notes.
The cash and cash equivalents and investments are held by a high-credit-quality
financial institution. For accounts receivable, the
F-29
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
Company performs ongoing credit evaluations of the financial condition of its
customers and does not require collateral. The Company maintains reserves for
credit losses, and such losses have been within management's expectations. The
concentration of credit risk is mitigated by the large customer base. The net
carrying amount of all of these financial instruments, excluding the senior
subordinated discount notes, approximates their fair value at September 30,
1999. The fair value of the senior subordinated discount notes approximates the
liquidation value (see Note 9).
Sources of Supplies/Significant Suppliers
The Company relies on local telephone companies and other companies to provide
data communications for its Internet access services. Furthermore, the Company
relies on SWBT and Qwest to provide the services that the Company resells to its
customers. Although management believes alternative telecommunication facilities
and providers could be found in a timely manner, any disruption of these
services could have an adverse effect on operating results.
Although the Company attempts to maintain numerous vendors for required
products, its modems, terminal servers, and high-performance routers, which are
important components of its network, are each currently acquired from a limited
number of sources. In addition, some of the Company's suppliers have limited
resources and production capacity. If the suppliers are unable to meet the
Company's needs as its network infrastructure grows, then delays and increased
costs in the expansion of the Company's network infrastructure could result,
having an adverse effect on operating results.
4. Acquisitions
In the period June 1, 1999 to September 30, 1999, the Company completed the
three acquisitions described below:
On June 17, 1999, the Company acquired all outstanding stock of Q-Networks Inc.
(Qnet), an ISP located in Kansas City, Missouri, from the sole stockholder for
$5,630,000, including the assumption of liabilities of approximately $649,000.
The purchase price was funded with $3,981,000 cash and $1,000,000 of financing
in the form of a convertible note payable issued to the seller. The note was
issued with an interest rate of 6 percent and is due in full or convertible no
later than June 2001. This note allows the seller to convert the note into
shares of the Company at the initial public offering price should the Company
complete an initial public offering any time prior to June 2001. The Company may
make prepayments at any
F-30
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
4. Acquisitions (continued)
time during the note term; however, should the note be prepaid in full, the
seller continues to have an option to acquire up to $1,000,000 of the Company's
stock in an initial public offering should it occur at any time prior to June
2001. Interest under the convertible note is due quarterly. In connection with
the issuance of the convertible note, the Company was required to place
$1,000,000 in escrow at the time of acquisition. The funds in escrow cannot be
accessed by the Company without the consent of the seller and thus are reflected
as restricted cash in the accompanying consolidated balance sheet at September
30, 1999. Approximately $1,056,000 and $4,264,000 were allocated to the acquired
customer list and goodwill, respectively, as a result of this transaction.
On June 22, 1999, the Company entered into an asset purchase agreement to
acquire the Internet access customer base of CySource, Inc. (CySource) for
approximately $602,000, including the assumption of liabilities of approximately
$8,000. The acquisition was funded with cash, and as of September 30, 1999, the
Company had made all required payments to the former stockholders of CySource.
Approximately $362,000 and $240,000 were allocated to the acquired customer list
and goodwill, respectively, as a result of this transaction.
As of September 30, 1999, the Company reviewed the carrying value of the
customer list as well as the goodwill associated with the CySource acquisition
and determined the following conditions:
i) The customer database used to determine the acquisition price was
corrupted, resulting in the actual number of customers receiving
Internet access from CySource at the date of acquisition being
significantly less than was expected.
ii) Subsequent to the acquisition date, the Company experienced
significant difficulties in merging the former CySource customers
into the Company's operations, which resulted in lost subscribers
well in excess of the Company's traditional customer attrition or
churn rate.
iii) Additionally, as the Company continued to review the customer
service and reputation of CySource, the Company identified that
the expected internal growth rate resulting from the acquisition
of the CySource customer base was significantly impacted in a
negative manner.
The foregoing factors have resulted in a material and permanent reduction in
both the forecasted cash flows for the operation and the results for the
four-month period ended
F-31
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
4. Acquisitions (continued)
September 30, 1999. Accordingly, the Company recorded a $254,000 charge to
earnings to reflect the impairment of the customer list and goodwill associated
with this acquisition. This charge was recorded ratably among these assets, and
the remaining $298,000 will be amortized over the estimated remaining useful
life of the customer list and goodwill.
On August 5, 1999, the Company entered into an asset purchase agreement to
acquire substantially all of the assets of InLink Communications Company
(Inlink), an ISP located in St. Louis, Missouri, for approximately $5,217,000,
including the assumption of liabilities of approximately $478,000. The
acquisition was funded with cash, and as of September 30, 1999, the Company had
made all required payments to the former stockholders of Inlink except for
$85,000 which is included in accounts payable at September 30, 1999.
Approximately $1,301,000 and $3,678,000 were allocated to the acquired customer
base and goodwill, respectively, as a result of this transaction.
The above acquisitions were accounted for under the purchase method of
accounting, and accordingly, the purchase prices were allocated to assets
acquired and liabilities assumed based upon their estimated fair values at the
dates of acquisition. The customer lists were valued at $200 per subscriber
acquired, which represents the estimated fair value of such subscribers based
upon recent transactions in the ISP industry. Included in the purchase prices
listed above are legal and acquisition costs of approximately $224,000. For
those businesses acquired, the results of operations are included in the
Company's consolidated statement of operations from the dates of acquisition.
The unaudited pro forma combined historical results of the Company and PNI, its
predecessor, as if PNC, Qnet, Cysoure and Inlink had been acquired by the
predecessor at the beginning of the respective periods, are included in the
table below. The pro forma combined historical results for KC One Internet
Services, Inc., Web World Services, Inc., and LidaNet, Inc. were not deemed
material and are not included in the table below.
Year ended Nine months ended
December 31, 1998 September 30, 1999
------------------------------------------------
Total revenues $ 9,350,099 $ 9,532,064
Net loss (7,447,087) (12,613,676)
The pro forma results above include amortization of intangibles and are not
necessarily indicative of what actually would have occurred if the acquisitions
had been completed as of the beginning of each of the periods presented, nor are
they necessarily indicative of future consolidated results.
F-32
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
5. Investments
At September 30, 1999, the Company held one U.S. government agency security that
is classified as held-to-maturity and is due in less than one year. This
investment's amortized cost, unrealized loss, and estimated fair value at
September 30, 1999 are $5,076,212, $1,437, and $5,074,775, respectively.
6. Property and Equipment
Property and equipment consist of the following at September 30, 1999:
Computer equipment $ 4,465,458
Software 478,574
Furniture, fixtures, and office equipment 680,884
Capitalized collocation costs 150,236
Land, building, and leasehold improvements 285,552
Vehicles 71,348
------------------
6,132,052
Less accumulated depreciation and amortization (1,881,830)
------------------
4,250,222
Construction in progress 4,650,709
==================
$ 8,900,931
==================
7. Intangible Assets
Intangible assets consist of the following at September 30, 1999:
Acquired customer list $ 2,771,783
Goodwill 11,631,661
------------------
14,403,444
Less accumulated amortization (1,293,192)
------------------
$ 13,110,252
==================
F-33
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
8. Accrued Liabilities
Accrued liabilities consist of the following at September 30, 1999:
Accrual for equipment acquired $ 1,836,572
Accrued payroll and related expenses 366,933
Other accrued liabilities 926,625
------------------
$ 3,130,130
==================
9. Related Party Transactions
Affiliates include officers, employees, and other corporations and partnerships
that are substantially or partially owned by officers and stockholders of the
Company. The significant affiliates include CBC Distribution and Marketing,
Inc., CDM Fantasy Sports, Inc., and CDM Properties Management, L.L.C.
As of September 30, 1999, amounts due from affiliates consist of the following:
Advances to affiliates $1,020,090
Accounts receivable - trade affiliates 32,415
----------------
$1,052,505
================
The advances to affiliates are unsecured, due on demand, and bear interest at 12
percent per annum, which is payable upon repayment of the advances.
As of September 30, 1999, the amount due to affiliates was $158,375 and
consisted primarily of borrowings from affiliates. Such advances are unsecured,
due on demand, and bear interest at 12 percent per annum, which is payable upon
demand.
Revenues derived from affiliates for the period June 1, 1999 to September 30,
1999 were approximately $162,000. Expenses and costs incurred to affiliates
related to purchasing advertising, insurance, and other services for the period
June 1, 1999 to September 30, 1999 were approximately $872,000.
The Company leases office space under noncancelable operating leases from an
affiliate. The leases expire in August 2008, contain an option to renew for a
five-year term, and provide for additional rent related to the Company's share
of certain taxes and operating expenses. Rent expense associated with these
leases was approximately $57,000 for the period June 1, 1999 to September 30,
1999.
F-34
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
9. Related Party Transactions (continued)
The Company leases certain computer equipment under capital leases with an
affiliate. These lease agreements required the Company to make a refundable
deposit equal to approximately 25 percent of the fair market value of the
equipment at the lease inception date, or $707,660. The assets under capital
leases are recorded at the lower of the present value of the minimum lease
payments or the fair value of the asset. The related computer equipment had a
cost and accumulated amortization of $2,565,764 and $566,902, respectively, at
September 30, 1999. Amortization of leased equipment is included in depreciation
and amortization.
Future minimum lease payments under capital leases and noncancelable operating
leases with the affiliate at September 30, 1999 are as follows:
Capital Operating
Leases Leases
-----------------------------------
2000 $ 1,259,470 $ 170,764
2001 1,054,596 172,423
2002 260,356 181,663
2003 - 181,663
2004 - 183,710
Thereafter - 748,610
-----------------------------------
Total minimum lease payments 2,574,422 $ 1,638,833
=================
Less amount representing interest (378,302)
------------------
Present value of minimum lease payments
(including current portion of $998,188) $ 2,196,120
==================
10. Senior Subordinated Discount Notes
The senior subordinated discount notes (the Notes), issued in connection with
the Purchase Agreement described in Note 2, mature on June 1, 2006 and were
issued at a substantial discount from their principal amount on the closing
date. Accordingly, the Notes will accrete semiannually at a rate of 12 percent
from $53,000,000 on June 1, 1999 to $84,473,948 (the Principal Amount) at June
1, 2003. Subsequently, interest will accrue on the Principal Amount at a rate of
12 percent. This interest will be due and payable on a semiannual basis
commencing on December 1, 2003 and thereafter on June 1 and December 1 of each
year until maturity. On June 1, 2006, all principal and accrued but unpaid
interest on the Notes will be due and payable. The discounted value (see Note 2)
and the liquidation value of the Notes at September 30, 1999 are $48,837,310 and
$55,100,000, respectively.
F-35
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
10. Senior Subordinated Discount Notes (continued)
At any time prior to maturity of the Notes, the accreted value, together with
any accrued but unpaid interest, may be redeemed or prepaid in whole or in part
as long as the Company is not in default on any senior indebtedness, as defined
in the agreement. In the event of a change in control, as defined in the
agreement, the Company must offer to repay these notes for an amount equal to
101 percent of the accreted value plus any accrued but unpaid interest.
If either (a) the Notes are redeemed in whole within 9 months of closing or (b)
the Notes are redeemed in whole within 15 months of the closing date through a
qualified public offering, as defined in the agreement, the Company may
repurchase the number of shares of common stock representing one-seventh of the
total common shares issued to the investors at June 1, 1999 for $0.01.
In the event of default, as defined in the note agreement, holders of at least a
25 percent interest in the principal amount of Notes outstanding may declare the
entire accreted value plus any accrued but unpaid interest immediately due and
payable by written notice to the Company. In addition, holders of a 50 percent
interest may (1) waive the Company's compliance with its covenants and
obligations under the Note and Purchase Agreement, (2) waive a breach or default
by the Company, or (3) rescind an acceleration of the Notes subject to certain
restrictions defined in the agreements. For the period June 1, 1999 to September
30, 1999, the Company was in violation of certain covenants included in the Note
and Purchase Agreement related primarily to transactions with affiliates. The
holders of Notes waived their right to call the debt as well as these violations
as of September 30, 1999.
11. Employee Benefit Plan
The Company sponsors a defined contribution 401(k) profit sharing plan covering
substantially all eligible employees. Under this plan, the Company matches 100
percent of the first 6 percent of compensation that employees contribute into
the plan. Additional contributions may be made to the plan at the discretion of
Company management. The Company made contributions of $22,110 to the plan for
the period June 1, 1999 to September 30, 1999.
F-36
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
12. Commitments, Contingencies, and Uncertainties
Lease Commitments
The Company leases vehicles and office and retail space under noncancelable
operating lease agreements with unaffiliated vendors. The leases for office and
retail space generally include renewal options and require the Company to pay a
portion of the expenses for common areas, including maintenance, real estate
taxes, and other expenses. Rent expense under these operating leases for the
period June 1, 1999 to September 30, 1999 was approximately $130,000.
The Company leases certain computer equipment under capital leases with
unaffiliated vendors. The assets under capital leases are recorded at the lower
of the present value of the minimum lease payments or the fair value of the
asset. The related computer equipment had a cost and accumulated amortization of
$611,817 and $383,489, respectively, at September 30, 1999. Amortization of
leased equipment is included in depreciation and amortization.
Future minimum lease payments under capital leases and noncancelable operating
leases with unaffiliated vendors with initial or remaining lease terms in excess
of one year are as follows at September 30, 1999:
Capital Operating
Leases Leases
--------------------------------
2000 $146,499 $ 411,848
2001 53,963 303,287
2002 41,502 199,627
2003 - 121,548
2004 - 50,701
--------------------------------
Total minimum lease payments 241,964 $ 1,087,011
===================
Less amount representing interest (20,813)
-------------
Present value of minimum lease payments
(including current portion of $138,831) $221,151
=============
Backbone Agreement
The Company has agreements with its principal ISP which require payment of
minimum monthly Internet access and other charges totaling $33,520. These
agreements automatically renew unless the ISP or Company terminates them, as
described in the agreements. The Company has additional agreements with two
other ISPs related to the acquisition of Inlink (see Note 4). These agreements
require the Company to make minimum monthly payments of
F-37
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
12. Commitments, Contingencies, and Uncertainties (continued)
Backbone Agreement (continued)
$6,800 and $1,300, respectively, for a specified period ending in January 2001.
The total minimum purchase requirements under these agreements for the years
ending September 30, 2000, 2001, and 2002, are $95,100, $81,600, and $20,200,
respectively. Under all agreements, additional monthly charges are incurred for
the use of capacity above the amounts contracted in the agreements. Expenses
incurred under all backbone agreements were $154,645 for the period June 1, 1999
to September 30, 1999.
Local Services
In August 1998, the Company's wholly owned subsidiary, PNC, entered into an
Interconnection Agreement with SWBT. The agreement establishes the terms and
conditions by which the Company and SWBT interconnect their local networks and
by which the Company gains access to unbundled elements of SWBT's network
pursuant to the Telecommunications Act of 1996. This access allows the Company
to compete effectively with SWBT in reselling local telephone service. SWBT has
appealed the PSC orders which established the agreement. While the Company has
negotiated an amendment to its Agreement with SWBT precluding an interruption of
service in the event of an adverse court ruling, the appeal leaves various
aspects of the Agreement uncertain as to duration. Furthermore, there is the
possibility that the current rates charged to the Company by SWBT could change
significantly. The Company's management and its legal counsel are unable to
estimate the probability of outcome or the potential economic impact on the
Company.
Long Distance Services
The Company has a $5 million three-year supply agreement, which has been amended
subsequent to September 30, 1999 to have an effective date of February 1, 2000,
with Qwest. The agreement provides for a cancellation charge to be assessed in
the event of early termination by the Company and a deficiency charge to be
assessed if the Company does not meet the minimum purchase levels each year of
the agreement. Expenses incurred with its long distance service provider were
$154,099 for the period June 1, 1999 to September 30, 1999. The minimum purchase
requirements under this agreement for the years ending September 30, 2000, 2001,
2002, and 2003, are $830,000, $1,416,000, $2,002,000, and $752,000,
respectively.
F-38
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
12. Commitments, Contingencies, and Uncertainties (continued)
Billing Services
The Company has a three-year agreement, effective August 7, 1998, with its
service processor that requires minimum annual purchases by the Company for
billing services. The agreement provides for a cancellation charge to be
assessed in the event of early termination by the Company and a deficiency
charge to be assessed if the Company does not meet the minimum purchase levels
each year of the agreement. Expenses incurred under this agreement were $61,642
for the period June 1, 1999 to September 30, 1999. The minimum purchase
requirements under this agreement for the years ending September 30, 2000 and
2001, are $360,000 and $300,000, respectively.
Guarantees
Letters of credit issued as prerequisites for entering agreements with the
Company's significant suppliers of $117,000 were outstanding at September 30,
1999.
13. Income Taxes
The difference between the effective income tax rate and the U.S. federal income
tax rate is explained as follows for the period June 1, 1999 to September 30,
1999:
Tax at U.S. statutory tax rate $ (2,558,000)
State income taxes, net of federal benefit (228,000)
Interest on senior subordinated discount notes 205,000
Intangibles 333,000
Other 9,000
Valuation allowance 2,239,000
-------------------
Provision for income taxes $ -
===================
The components of the deferred tax asset are as follows as of September 30,
1999:
Vacation accruals $ 41,000
Organizational costs 54,000
Allowance for doubtful accounts 239,000
Reserve for inventory obsolescence 9,000
Intangibles 237,000
Capital leases 72,000
Interest on senior subordinated discount notes 707,000
Property and equipment 18,000
F-39
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
Net operating loss carryforward 2,255,000
------------------
3,632,000
Valuation allowance (3,632,000)
------------------
Total deferred taxes $ -
==================
The Company's net operating loss carryforwards were approximately $5,914,000 at
September 30, 1999 and expire on various dates through 2019. The Company has
recorded a valuation allowance for the entire deferred tax asset balance as of
September 30, 1999 due to the uncertainty of its realization.
14. Stockholder Equity
Series A Preferred Stock
Pursuant to the Purchase Agreement discussed in Note 2, one investor, who also
acted as a financial advisor and exclusive placement agent in the transaction,
received 2,306,765 shares of Series A preferred stock. These preferred shares
have no liquidation preference and are not entitled to vote on matters submitted
for stockholder approval.
Each preferred stockholder has the right at any time to convert any or all
shares into an equal number of common shares subject to the following:
(i) The total number of shares held by a Series A stockholder, aggregated
with any common shares held by an affiliate of such holder, and after
giving effect to the proposed conversion, shall be less than 5 percent
of the total shares of common stock outstanding immediately after such
conversion.
(ii) Upon the occurrence of a change in federal law that permits a registered
bank holding company to acquire in excess of 5 percent of the voting
shares of the Company, a Series A stockholder may convert its shares to
common stock to the maximum extent permitted by then-current federal
law.
(iii)In the event the Company (a) subdivides its outstanding shares of
common stock into a larger number of shares or (b) combines its
outstanding shares of common stock into a smaller number of shares, then
the number of shares of common stock into which the Series A preferred
stockholder are convertible shall also be adjusted proportionally.
F-40
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
14. Stockholder Equity (continued)
Warrants
Also in connection with the Purchase Agreement discussed in Note 2, the Company
issued 4,476,423 detachable non-callable warrants to the Investors. The warrants
entitle the holders to purchase common shares of the Company at a price of
$3.385 per share. The warrants may be exercised by a cash payment or a cashless
exercise following either (i) the occurrence of a qualified public offering or
(ii) upon delivery of the subordinated notes for cancellation in an accreted
principal amount, along with any interest, equal to the exercise price. The
warrants are also subject to certain anti-dilution adjustments, as defined in
the Purchase Agreement, for any changes in the Company's outstanding shares
during the period the warrants are outstanding. The warrants expire on June 1,
2006 and can be exercised at any time.
Stock Option Plan
In July 1999, the Company established a stock option plan under which both
qualified and nonqualified options to purchase up to 3,468,820 shares of common
stock are available to be granted to employees, directors, and consultants. At
September 30, 1999, 753,579 shares are available for grant under the plan. The
plan is administered by the Board of Directors. No option can be for a term of
more that ten years from the date of grant. The option price and the vesting
provisions are determined by the Board of Directors at the date of grant.
Stock option activity under the plan during the period June 1, 1999 to September
30, 1999 is as follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Options Exercise Price
-------------------- --------------------
<S> <C> <C>
Outstanding at June 1, 1999 - $ -
Granted 2,715,241 1.52
Exercised, forfeited, and expired - -
-------------------- --------------------
Outstanding at September 30, 1999 2,715,241 $1.52
==================== ====================
Exercisable at September 30, 1999 366,295 $1.52
==================== ====================
</TABLE>
Pro forma information regarding results of operations is required by SFAS No.
123 as if the Company had accounted for its stock-based awards under the fair
value method of SFAS No. 123. The fair value of the Company's stock-based awards
to employees has been estimated using the minimum value option pricing model
which does not consider stock price volatility.
F-41
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
14. Stockholder Equity (continued)
Stock Option Plan (continued)
Because the Company does not have actively traded equity securities, volatility
is not considered in determining the fair value of the stock-based awards.
For the period June 1, 1999 to September 30, 1999, the fair value of the
Company's stock-based awards was estimated using the following weighted average
assumptions:
Expected life of options in years 3
Risk-free interest rate 5.5 percent
Expected dividend yield 0.0 percent
The weighted average remaining contractual life of the stock options outstanding
at September 30, 1999 is approximately ten years. The per share weighted average
fair value of stock options granted during the period June 1, 1999 to September
30, 1999 was zero. Accordingly, for pro forma purposes, the estimated fair value
of the Company's stock-based awards which is to be amortized over the options'
vesting period would have resulted in no change in the Company's reported net
loss for the period June 1, 1999 to September 30, 1999.
The effect of applying SFAS No. 123 to pro forma net income (loss) as stated
above is not necessarily representative of the effects on reported net income
(loss) for future periods due to, among other things, the vesting period of the
stock options and the fair value of additional stock options granted in future
years.
Shares Reserved for Future Issuance
Common stock shares reserved for future issuance as of September 30, 1999 are as
follows:
Warrants 4,476,423
Convertible Series A preferred stock 2,306,765
Stock options 3,468,820
------------------
10,252,008
==================
F-42
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
15. Segment Information
The Company has three reportable segments, Internet, Retail, and Communications,
which are separate operating units that offer different products and services
and are managed accordingly. Performance of each segment is evaluated by
management based on income (loss) before income taxes. Transactions between
segments are reported at fair value and the accounting policies of the segments
are the same as those in Note 1. The corporate and eliminations segment includes
corporate assets, principally consisting of cash and cash equivalents,
investments and debt issuance costs, corporate activities and the elimination of
intersegment transactions. In addition, as a result of the transactions
described in Notes 1 and 2, the Company adjusted its segment reporting structure
whereby interest expense is no longer allocated to its three reportable
segments.
The Internet segment provides full service access to the Internet for corporate
and residential customers including dial-up and dedicated services and
activities related to set up and installation, selling equipment and software.
The Retail segment sells cellular and other wireless communication products,
including phones, pagers, and related accessories. The Communications segment
provides facilities-based and resold basic local telecommunications service,
including dedicated/non-switched local exchange services, and intrastate
interexchange services.
The following segment information is as of September 30, 1999 or for the four
months then ended:
<TABLE>
<CAPTION>
Corporate
and
Internet Retail Communications Eliminations Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from
external
customers $ 2,881,055 $ 350,715 $ 850,367 $ - $ 4,082,137
Intersegment
revenues 4,554 73,792 86,434 (164,780) -
Depreciation
and
amortization 1,145,516 9,848 593,897 17,640 1,766,901
Impairment
charge
(Note 4) 254,132 - - - 254,132
Interest expense - - - 2,701,311 2,701,311
Loss before
income taxes (1,081,229) (77,424) (2,198,581) (3,951,469) (7,308,703)
</TABLE>
F-43
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Segment assets 14,466,339 234,800 10,075,595 36,987,683 61,764,417
Capital
expenditures,
net of
accounts
payable 431,129 - 3,092,593 248,334 3,772,056
</TABLE>
16. Subsequent Events
Acquisitions
Subsequent to year-end, the Company made the following acquisitions:
On October 1, 1999, the Company purchased substantially all of the assets of
Information Systems Technologies, Inc. for approximately $591,000, net of
liabilities assumed.
On October 6, 1999, the Company purchased substantially all of the assets of
Business Products Systems Internet, Inc. for approximately $700,000, net of
liabilities assumed.
On October 13, 1999, the Company purchased substantially all of the assets of
UNI Networking Inc. for approximately $345,000, net of liabilities assumed.
On October 20, 1999, the Company purchased all of the outstanding common stock
of GlobalVision Systems, Inc. for approximately $3,102,000, net of cash acquired
and liabilities assumed.
On November 1, 1999, the Company purchased all of the outstanding common stock
of Harvest Telecom, Inc. for approximately $50,000.
On November 10, 1999, the Company purchased all of the outstanding common stock
of Digital Internet Access, Inc. for approximately $1,418,000, net of cash
acquired and liabilities assumed.
F-44
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
16. Subsequent Events (continued)
Secondment Agreement
On November 23, 1999, the Company entered into a Secondment Agreement with an
investor to obtain certain services to be provided by an employee of the
investor. Under the terms of the agreement, the Company is required to pay
$17,500 per month for the services, including out-of-pocket expenses.
Furthermore, the seconded employee was issued 680,000 shares of Series B
preferred stock which vests in eight equal quarterly installments over a
two-year period and warrants with an exercise price of $1.52 per share to
purchase an additional 520,000 shares of Series B preferred stock which vest in
three equal annual installments. Furthermore, the investor was issued 170,000
shares of Series B preferred stock and was granted warrants with an exercise
price of $1.52 to purchase an additional 130,000 shares of Series B preferred
stock, both with the same vesting terms as the seconded employee described
above. All of the above issuances and grants vest immediately upon the
occurrence of certain events described in the agreement, including a change in
control. The Company will recognize the applicable compensation expense related
to these transactions ratably over the vesting period. Finally, the investor is
entitled to receive a fee, payable immediately, in the event the Company
consummates certain transactions outlined in the agreement prior to June 1,
2000, including a change in control, obtaining senior debt from a financial
institution, or issuing additional subordinated debt or equity securities.
Sale Leaseback
On March 31, 2000, the Company entered into a sale leaseback agreement, whereby
the Company sold collocation equipment with a book value of approximately
$8,000,000 and subsequently entered into a capital lease for approximately
$9,400,000, including the financing of approximately $900,000 in equipment
maintenance agreements. The assets under the capital lease are recorded at the
lower of the present value of the minimum lease payments or the fair value of
the equipment. The gain resulting from this transaction of approximately
$500,000 is being amortized over the term of the lease. Under the terms of the
lease, the Company is required to make six monthly payments of approximately
$106,000 and then thirty monthly payments of approximately $340,000. In addition
to the equipment being financed under the lease, the Company granted the lessor
an additional security interest in substantially all tangible and intangible
assets of the Company. The lessor has provided a contingent clause in the
agreement for the release of the additional security upon the Company obtaining
unrestricted cash equity proceeds in the amount of $50,000,000 or greater.
F-45
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
16. Subsequent Events (continued)
Lease Commitment
On April 15, 2000 the Company entered into an agreement for the lease of a new
office building. The term of the agreement is five years with total annual rent
of approximately $1,200,000.
Pending Transaction
On April 17, 2000, the Company signed an agreement and plan of merger (merger
agreement) with Mpower Communications Corp. (A/K/A MGC Communications, Inc.)
In connection with the consummation of the merger agreement, the following will
occur:
(vi) The Company's stockholders will exchange their shares in the Company
for 1,350,000 shares of common stock of Mpower Communications Corp.
(Mpower). Each outstanding share of the Company's common stock and
preferred stock will be converted into .02022 shares of Mpower common
stock.
(vii) All of the Company's stock options outstanding under the Company's
stock option plan shall continue to have, and be subject to, the same
terms and conditions as set forth in the Company's stock option plan
and the agreements pursuant to which such Company stock options were
issued, except that each Company stock option shall be exercisable for
.02022 shares of Mpower common stock and the price per share will be
adjusted accordingly.
(viii) The Company's 4,476,423 detachable non-callable warrants to the
Investors that entitle the holders to purchase common shares of the
Company at a price of $3.385 per share shall continue to be subject to
the same terms and conditions, except that each warrant shall be
exercisable for .02022 shares of Mpower common stock and the price per
share will be adjusted accordingly.
(ix) Mpower will assume approximately $80,000,000 of net liabilities of the
Company, a portion of which will be swapped for additional high-yield
bonds to be issued under Mpower's recent high-yield financing
indenture. The holders of the swapped debt will also receive 50,000
shares of Mpower common stock.
(x) Mpower will become the sole stockholder of the Company.
F-46
<PAGE>
Primary Network Holdings, Inc.
Notes to Consolidated Financial Statements (continued)
September 30, 1999
16. Subsequent Events (continued)
Note Payable
On April 27, 2000 the Company issued a $10,000,000 senior promissory note
(senior note) to Mpower due the earlier of April 17, 2001, upon a change of
control of the Company other than the pending transaction discussed above, or
upon the event of default, as defined. Interest accrues at 15 percent per annum
until the maturity date. After the maturity date, interest accrues at 18 percent
per annum until the senior note is paid in full. At any time prior to maturity
of the senior note, the unpaid principal amount of the senior note together with
any accrued but unpaid interest may be prepaid in whole or in part as long as
the Company has provided at least 15 business day's notice to Mpower.
Due to the issuance of this senior note, the Company was in violation of a
covenant included in the Note and Purchase Agreement (See Note 10) related
primarily to limitations of indebtedness. The holders of Notes waived their
right to call the debt as well as this violation as of April 27, 2000.
F-47
<PAGE>
Financial Statements
CDM On-Line, Inc.
For the period January 1, 1999 to May 31, 1999
with Report of Independent Auditors
F-48
<PAGE>
CDM On-Line, Inc.
Financial Statements
For the period January 1, 1999 to May 31, 1999
Contents
Report of Independent Auditors..............................................F-50
Financial Statements
Balance Sheet...............................................................F-51
Statement of Operations.....................................................F-52
Statement of Stockholders' Equity...........................................F-53
Statement of Cash Flows.................................................... F-54
Notes to Financial Statements...............................................F-55
F-49
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
CDM On-Line, Inc.
We have audited the accompanying balance sheet of CDM On-Line, Inc. as of May
31, 1999 and the related statements of operations, stockholders' equity, and
cash flows for the period January 1, 1999 to May 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CDM On-Line, Inc. at May 31,
1999 and the results of its operations and its cash flows for the period January
1, 1999 to May 31, 1999, in conformity with accounting principles generally
accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company has incurred significant operating losses and has an accumulated
deficit. These conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The May 31, 1999 financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Ernst & Young LLP
November 19, 1999
St. Louis, Missouri
F-50
<PAGE>
CDM On-Line, Inc.
Balance Sheet
May 31, 1999
Assets
Current assets:
Cash and cash equivalents $ 73,938
Accounts receivable, less allowance for doubtful accounts
of $126,845 558,980
Due from affiliates 1,624,811
Inventory, less reserve for obsolescence of $23,450 96,326
Other current assets 24,105
---------------
Total current assets 2,378,160
Property and equipment, net 1,397,284
Refundable capital lease deposit with affiliate 295,739
Intangible assets, net 369,847
---------------
$ 4,441,030
===============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 845,452
Accrued expenses 336,555
Unearned revenues 471,443
Current maturities of capital lease obligations 388,473
Due to affiliates 160,018
---------------
Total current liabilities 2,201,941
Capital lease obligations, less current maturities 492,346
Stockholders' equity:
Common stock, $.15 par value; 2,000,000 shares authorized 224,519
Additional paid-in capital 6,680,887
Accumulated deficit (4,933,386)
---------------
1,972,020
Treasury stock at cost (225,277)
---------------
1,746,743
---------------
$ 4,441,030
===============
See accompanying notes.
F-51
<PAGE>
CDM On-Line, Inc.
Statement of Operations
For the period January 1, 1999 to May 31, 1999
Revenues:
Access revenues $2,070,368
Retail revenues 518,124
Other revenues 244,792
----------------
2,833,284
Costs and expenses:
Costs of access revenues 614,441
Costs of retail revenues 299,287
Costs of other revenues 160,967
Operations and customer support 387,078
Sales and marketing 377,952
General and administrative 978,661
Retail store expenses 518,571
Depreciation and amortization 168,923
----------------
3,505,880
----------------
Loss from operations (672,596)
Other income (expense):
Interest expense - affiliates (18,009)
Interest expense (1,149)
Interest income - affiliates 8,671
Other income, net 1,177
----------------
Loss from continuing operations (681,906)
Loss from disposal of discontinued Web development
division (Note 12) (81,785)
----------------
Net loss $ (763,691)
================
See accompanying notes.
F-52
<PAGE>
<TABLE>
<CAPTION>
CDM On-Line, Inc.
Statement of Stockholders' Equity
For the period January 1, 1999 to May 31, 1999
Additional
Common Stock Paid-In Accumulated Treasury Stock
Shares Amount Capital Deficit Shares Amount
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 1,222,406 $183,361 $3,841,839 $(4,169,695) 5,393 $ (59,239)
Net loss - - - (763,691) - -
Contribution of services - - 233,162 - - -
Sale of stock 214,298 32,145 2,214,027 - - -
Sale of stock to employees under
employee stock purchase plan 850 127 10,130 - - -
Stock awards to employees 59,241 8,886 381,729 - - -
Common stock purchased for treasury
- - - - 13,756 (166,038)
----------------------------------------------------------------------------------------
Balance at May 31, 1999 1,496,795 $224,519 $6,680,887 $(4,933,386) 19,149 $(225,277)
========================================================================================
</TABLE>
See accompanying notes.
F-53
<PAGE>
CDM On-Line, Inc.
Statement of Cash Flows
For the period January 1, 1999 to May 31, 1999
Operating activities
Net loss $ (763,691)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 185,939
Stock-based compensation expense 390,615
Allowance for doubtful accounts 37,760
Changes in operating assets and liabilities:
Accounts receivable (280,550)
Due from affiliates (53,896)
Inventory 34,208
Other current assets 17,013
Refundable capital lease deposit with affiliate (295,739)
Other assets 174,105
Accounts payable 472,888
Accrued expenses 151,513
Unearned revenues 80,895
-------------------
Net cash provided by operating activities 151,060
Investing activities
Advances to affiliates (1,302,159)
Business acquisition costs (454,783)
Purchases of property and equipment (147,559)
-------------------
Net cash used in investing activities (1,904,501)
Financing activities
Principal payments of obligations under capital leases (37,263)
Net payments under line of credit (20,000)
Purchase of common stock held in treasury (166,038)
Due to affiliates (506,329)
Proceeds from issuance of common stock 2,256,429
-------------------
Net cash provided by financing activities 1,526,799
-------------------
Net decrease in cash and cash equivalents (226,642)
Cash and cash equivalents at beginning of period 300,580
-------------------
Cash and cash equivalents at end of period $ 73,938
===================
Supplemental cash flow information
Cash paid during period for:
Interest $ 19,158
===================
Noncash investing and financing transaction:
Capital lease obligations incurred $ 918,082
===================
See accompanying notes.
F-54
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements
May 31, 1999
1. Organization/Basis of Presentation
CDM On-Line, Inc. (the Company) is a local provider of Internet access and other
Internet-related services in St. Louis and Kansas City, Missouri. In addition,
the Company serves as an authorized agent of Southwestern Bell Mobile Systems
and operates cellular and other wireless communication products retail stores in
the St. Louis metropolitan area. The Company was organized on September 23, 1994
(Inception) and began providing Internet services in July 1995. The Company
commenced its retail operations in November 1996. The Company's targeted markets
include residential and business customers in Missouri.
The financial statements of the Company for the period January 1, 1999 to May
31, 1999 have been prepared on a going-concern basis which contemplates the
realization of assets and the settlement of liabilities and commitments in the
normal course of business. The Company incurred a net loss of $763,691 for the
five-month period ended May 31, 1999 and as of May 31, 1999 had an accumulated
deficit of $4,933,386. Additionally, the Company continues to commit substantial
capital expenditures as it relates to improvements and upgrades to its
infrastructure, which are necessary for the Company to be able to offer its
future core services. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Furthermore, the online
services and Internet markets are highly competitive. The Company believes that
existing competitors, Internet-based services, Internet services providers
(ISPs), Internet directory services, and telecommunications companies are likely
to enhance their service offerings, resulting in greater competition for the
Company. The competitive conditions could have the following effects: require
additional pricing programs, increase spending on marketing, limit the Company's
ability to expand its subscriber base, and result in increased attrition in the
existing subscriber base. The Company's viability as a going concern is
dependent upon management's operational and financing plans to address these
conditions which include, but are not limited to, obtaining additional equity
and debt financing, continuing investments in its infrastructure to increase its
efficiency and capacity to serve additional customers, and employing marketing
strategies to increase its customer base. Although there can be no assurance
that growth in the Company's revenues or subscriber base will continue or that
the Company will be able to achieve or sustain profitability or positive cash
flow, the Company believes that these steps are appropriate and will enable the
Company to effectively reorganize its operations. Under current circumstances,
the Company's ability to continue as a going concern depends upon the successful
implementation of its plan. If the Company is unsuccessful in its efforts, it
may be necessary to undertake such other actions as may be appropriate to
preserve asset values. The financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from
the outcome of this uncertainty.
F-55
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
May 31, 1999
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments with a maturity of
three months or less at the time of purchase to be cash equivalents.
Property and Equipment
Property and equipment, including leasehold improvements, are stated at cost.
Costs related to software developed for internal use are capitalized in
accordance with AcSEC Statement of Position 98-1, Accounting for the Costs of
Computer Software Developed For or Obtained For Internal Use. Depreciation is
calculated using the straight-line method over the estimated useful lives
ranging from 18 months to 15 years. Leasehold improvements are amortized over
the lesser of the related lease term or the useful life of the assets.
Equipment acquired under capital leases is amortized over its related lease
terms or its estimated productive useful lives, depending on the criteria met in
determining the lease's qualification as a capital lease. Costs of repairs and
maintenance are charged to expense as incurred.
Inventory
Inventory consists of cellular and other wireless communication products and
accessories and is stated at the lower of cost (specific identification basis)
or market.
Customer Lists
The cost of customer lists acquired is being amortized over three years using
the straight-line method.
F-56
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
May 31, 1999
2. Summary of Significant Accounting Policies (continued)
Goodwill
Goodwill, which represents the cost in excess of the fair market value of
identifiable net assets acquired, is being amortized using the straight-line
method over three years.
Impairment of Long-Lived Assets
At each balance sheet date, management determines whether any property or
equipment or any other assets have been impaired based on the criteria
established in Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of. The Company made no adjustments to the carrying values of its
assets during the period January 1, 1999 to May 31, 1999.
Stock Compensation
The Financial Accounting Standards Board's SFAS No. 123, Accounting for
Stock-Based Compensation, establishes the use of the fair value-based method of
accounting for stock-based employee compensation arrangements, under which
compensation cost is determined using the fair value of stock-based compensation
determined as of the grant date and is recognized over the periods in which the
related services are rendered. SFAS No. 123 also permits companies to elect to
continue using the intrinsic value accounting method specified in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25), and related interpretations to account for stock-based compensation. The
Company has elected to retain the intrinsic value-based method and will disclose
in its financial statements the pro forma effect of using the fair value-based
method to account for its stock-based compensation.
Revenue Recognition
Access revenues: Internet customers are billed in advance for the periods for
which Internet services are provided. Internet access service plans range from
one month to one year. The Company defers recognition of revenue on these
advance billings and amortizes the amounts to revenue on a straight-line basis
as the services are provided.
F-57
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
May 31, 1999
2. Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued)
Retail revenues: These revenues consist primarily of retail product sales of
cellular and other wireless products, such as phones, pagers, and related
accessories. Such sales are recorded upon customer purchase. The Company also
generates revenues from activation commissions from cellular carriers for each
new cellular phone subscription sold by the Company. Revenue from such
commissions is recorded upon customer subscription. New subscription activation
commissions are fully refundable if the subscriber cancels service within a
certain minimum period of continuous active service (generally 180 days).
Customers generally sign a service agreement that requires a customer deposit
which is forfeited in case of early cancellation. At May 31, 1999, the Company's
allowance for accounts receivable includes an amount for estimated cancellation
losses, net of deposit forfeitures.
The Company generally receives monthly residual income from the cellular service
providers based on a percentage of actual phone usage by subscribers. Revenue
from residual income is recorded as the cellular service is provided. Revenue
from prepaid pager service is deferred and recognized over the period service is
provided, usually annually. Revenue from monthly installment pager service
contracts is recorded as received.
Other revenues: Other revenues consist of setup and installation fees and
selling equipment and software.
Costs of Revenues
Costs of access revenues primarily consist of telecommunications expenses
inherent in the network infrastructure, including fees paid for the lease of the
Company's backbone. Costs of retail revenues consist of the costs of cellular
and other wireless communication products and accessories purchased for resale.
Costs of other revenues primarily consist of the costs of equipment and software
purchased for resale.
Advertising Costs
All advertising and promotion costs are expensed as incurred and totaled $77,567
for the period January 1, 1999 to May 31, 1999.
F-58
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
May 31, 1999
2. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company is treated as an S Corporation under the provisions of the Internal
Revenue Code, whereby the Company's income or loss is allocated to the
individual stockholders for federal income tax purposes. While the Company is
not subject to federal income taxes, it is subject to certain state and local
taxes, which were not significant for the period presented.
If the Company had been subject to federal and certain state income taxes for
the period ended May 31, 1999, the Company would have been in a net deferred tax
asset position which would have been fully offset by a valuation allowance. Any
tax benefit or provision for the period ended also would have been fully offset
by changes in the deferred tax asset valuation allowance. Therefore, unaudited
pro-forma income tax information is not presented in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes," as if
the Company had been subject to federal and certain state income taxes.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and accounts receivable. The cash is held
by a high-credit-quality financial institution. For accounts receivable, the
Company performs ongoing credit evaluations of the financial condition of its
customers and does not require collateral. The Company maintains reserves for
credit losses, and such losses have been within management's expectations. The
concentration of credit risk is mitigated by the large customer base. The net
carrying amount of the receivables approximates their fair value.
Sources of Supplies
The Company relies on local telephone companies and other companies to provide
data communications. Although management feels alternative telecommunication
facilities could be found in a timely manner, any disruption of these services
could have an adverse effect on operating results.
Although the Company attempts to maintain numerous vendors for required
products, its modems, terminal servers, and high-performance routers, which are
important components of its network, are each currently acquired from three
sources. In addition,
F-59
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
May 31, 1999
2. Summary of Significant Accounting Policies (continued)
Sources of Supplies (continued)
some of the Company's suppliers have limited resources and production capacity.
If the suppliers are unable to meet the Company's needs as its network
infrastructure grows, then delays and increased costs in the expansion of the
Company's network infrastructure could result, having an adverse effect on
operating results.
3. Business Combinations
During the period January 1, 1999 to May 31, 1999, the Company acquired certain
assets from three Internet access service providers as described below:
On February 17, 1999, the Company purchased the customer list of KC One Internet
Services, Inc. for approximately $75,000. Approximately $37,000 was allocated to
the acquired customer list, and approximately $38,000 was allocated to goodwill.
On March 31, 1999, the Company entered into an asset purchase agreement to
acquire the customer base and certain computer equipment of Web World Services,
Inc. for approximately $167,000, including approximately $19,000 for the payment
of a liability related to terminating a lease agreement. Approximately $65,000
was allocated to the acquired customer list, and approximately $89,000 was
allocated to goodwill.
On April 9, 1999, the Company entered into an asset purchase agreement to
acquire the customer base and certain networking equipment of LidaNet, Inc. for
approximately $213,000, including approximately $72,000 for the payment of
certain liabilities related to terminating certain lease agreements.
Approximately $103,000 was allocated to the acquired customer list, and
approximately $68,000 was allocated to goodwill.
The above acquisitions were accounted for under the purchase method, and
accordingly, the purchase prices were allocated to assets acquired and
liabilities assumed based upon their estimated fair values at the dates of
acquisition. The customer lists were valued at $200 per subscriber acquired,
which represents the estimated fair value of such subscribers based upon recent
transactions in the ISP industry. Included in the purchase prices listed above
are legal and acquisition costs of $30,000. For those businesses acquired, the
results of operations are included in the Company's statement of operations from
the dates of acquisition.
F-60
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
May 31, 1999
3. Business Combinations (continued)
The combined historical results for KC One Internet Services, Inc., Web World
Services, Inc., and LidaNet, Inc. were not deemed to be material and thus the
unaudited proforma combined historical results are not presented.
4. Property and Equipment
Property and equipment consist of the following at May 31, 1999:
Computer equipment $1,801,319
Software 170,512
Furniture, fixtures, and office equipment 33,864
Land, building, and leasehold improvements 109,930
Vehicles 44,913
------------------
2,160,538
Less accumulated depreciation and amortization (763,254)
------------------
$1,397,284
==================
5. Related Party Transactions
Affiliates include officers, employees, and other corporations and partnerships
that are substantially or partially owned by officers and stockholders of the
Company. The significant affiliates include CBC Distribution and Marketing,
Inc., CDM Fantasy Sports, Inc., CDM Properties Management, L.L.C. (CDM
Properties), and BroadSpan Communications, Inc. (BroadSpan).
As of May 31, 1999, amounts due from affiliates consist of the following:
Advances to affiliates $1,454,331
Accounts receivable - trade affiliates 170,480
---------------
$1,624,811
===============
The advances to affiliates are unsecured, due on demand, and bear interest at 12
percent per annum, which is payable upon repayment of the advances.
As of May 31, 1999, the due to affiliates was $160,018 and consisted primarily
of borrowings from affiliates. Such advances are unsecured, due on demand, and
bear interest at 12 percent.
F-61
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
May 31, 1999
5. Related Party Transactions (continued)
Revenues derived from affiliates related to providing Internet access and other
services for the period January 1, 1999 to May 31, 1999 were approximately
$126,172. Expenses and costs incurred to affiliates related to purchasing
advertising and insurance for the period January 1, 1999 to May 31, 1999 were
approximately $23,332.
The Company leases office space under noncancelable operating leases from an
affiliate. The leases expire in August 2008, contain an option to renew for a
five-year term, and provide for additional rent related to the Company's share
of certain taxes and operating expenses. Rent expense associated with these
leases was approximately $36,000 from January 1, 1999 to May 31, 1999, and such
amounts and the future minimum lease payment are included in the disclosure in
Note 10.
The Company leases certain network-related equipment on a month-to-month basis
from an affiliate. Rent expense for the equipment for the period January 1, 1999
to May 31, 1999 was approximately $29,000. Total future minimum lease payments
under these month-to-month leasing arrangements are expected to approximate
$35,000 and will be paid within one year.
An affiliate provides the Company the use of its programmers, certain equipment,
payroll services and the administration of the 401(k) defined contribution plan.
All labor and administrative costs provided by the affiliate were expensed and
were $233,162 during the five months ended May 31, 1999.
In May 1999, the Company sold its investment in Interchange Technologies, Inc.,
which was an investment in a private company that provided educational courses
over the Internet, to CDM Properties for $160,000. This purchase price
represented the net book value of that investment on the date of sale, and
accordingly, no gain or loss occurred as a result of this transaction.
6. Intangible Assets
Intangible assets consisted of the following at May 31, 1999:
Acquired customer list $206,000
Goodwill 195,083
---------------
401,083
Less accumulated amortization (31,236)
---------------
$369,847
===============
F-62
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
May 31, 1999
7. Accrued Liabilities
Accrued liabilities consisted of the following at May 31, 1999:
Due to employee from treasury stock transaction $125,000
Other 211,555
-------------
$336,555
=============
8. Employee Benefit Plan
Employees of the Company are eligible to participate in a defined contribution
401(k) profit sharing plan, sponsored by an affiliate, covering substantially
all eligible employees. The Company matches 100 percent of the first 6 percent
of compensation that employees contribute into the plan. Additional
contributions may be made to the plan at the discretion of Company management.
The Company made contributions of $20,310 to the plan for the period January 1,
1999 to May 31, 1999.
9. Line of Credit
The Company has a line of credit with a bank allowing borrowings of up to
$25,000. Interest is payable monthly at the bank's prime rate plus .5 percent
(9.00 percent at May 31, 1999). The principal balance and any unpaid accrued
interest are payable on November 20, 1999. The line is secured by accounts
receivable, inventory, and property and equipment and is personally guaranteed
by certain stockholders. No borrowings were outstanding against the line at May
31, 1999.
10. Commitments
Lease Commitments
The Company leases vehicles and office and retail space under noncancelable
operating lease agreements. The leases for office and retail space generally
include renewal options and require the Company to pay a portion of the expenses
for common areas, including maintenance, real estate taxes, and other expenses.
Rent expense under all operating leases for the period January 1, 1999 to May
31, 1999 was $123,894.
The Company leases certain computer equipment under capital leases with an
affiliate. These lease agreements require the Company to make a refundable
deposit equal to approximately 25 percent of the fair market value of the
equipment at the lease inception
F-63
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
May 31, 1999
10. Commitments (continued)
Lease Commitments (continued)
date. The total amount deposited to this affiliate under these leases was
$295,739. The assets under capital leases are recorded at the lower of the
present value of the minimum lease payments or the fair value of the asset. The
related computer equipment had a cost and accumulated amortization of $918,082
and $53,830, respectively, at May 31, 1999. Amortization of leased equipment is
included in depreciation and amortization.
Future minimum lease payments under capital leases and noncancelable operating
leases with initial or remaining lease terms in excess of one year (including
operating lease commitments to affiliates disclosed in Note 5) are as follows at
May 31, 1999:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------------------------------------
<S> <C> <C>
2000 $ 488,049 $ 349,451
2001 399,001 338,982
2002 147,694 316,531
2003 - 211,748
2004 - 198,590
Thereafter - 433,971
-------------------------------------
Total minimum lease payments 1,034,744 $1,849,273
====================
Less amount representing interest 153,925
-----------------
Present value of minimum lease payments (including
current portion of $388,473) $ 880,819
=================
</TABLE>
Backbone Agreement
At May 31, 1999, the Company has three agreements with its principal ISP which
require payment of minimum monthly Internet access and other charges totaling
$19,185 per month. Additional monthly charges are incurred for the use of
capacity above the amounts contracted in the agreements. The agreements
automatically renew on a month-to-month basis unless the ISP or Company
terminates them, as described in the agreements. Expenses incurred under these
agreements were $120,405 for the period January 1, 1999 to May 31, 1999.
F-64
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
May 31, 1999
11. Stockholder Equity
Restrictive Stock Agreement
Under the terms of the 1994 restrictive stock agreement, as subsequently amended
in November 1996, certain employees/stockholders are restricted in their ability
to sell common stock of the Company. Specifically, if a stockholder desires to
sell Company common stock, written consent of the sale must be obtained from the
Company. In the absence of written consent, the Company possesses a "right of
first refusal" under which the employees/stockholders must first offer the stock
for sale to the Company before it may be sold to another party. The purchase
price for common stock purchased under the right of first refusal is based on
book value. The Company also has the right to purchase common stock from an
employee under voluntary or involuntary termination, as defined. The purchase
price for a voluntary termination is the book value, while for involuntary
termination the purchase price is a formula price defined in the agreement. If
the Company decides not to exercise its right of first refusal or right to
purchase stock in the event of termination, each stockholder has the right for a
certain period of time to purchase such common stock at the same price and terms
as the Company's rights. The restrictive stock agreement also obligates the
Company to repurchase, at a formula price, all of the stock owned by an
employee/stockholder in the event of death.
Common Stock
In December 1997, the Board of Directors approved the implementation of an
employee stock purchase program whereby employees eligible for the 401(k)
defined contribution plan are also eligible to purchase Company stock through
payroll withholdings. Purchases of Company stock are made at the end of each
quarter at a price determined by a formula, essentially based on multiples of
sales and certain other factors. During the period January 1, 1999 to May 31,
1999, employees purchased 850 shares of stock through the stock purchase program
for $10,257. Employees may sell and the Company is obligated to buy common stock
purchased under the program at the formula price in the quarter in which the
common stock is sold. Repurchased shares are carried as treasury stock, at cost.
In December 1997, the Company granted an officer an option to purchase 10,000
shares of common stock at an exercise price of $15 per share. The option vested
immediately and expires five years from the grant date.
In January 1998, the Board of Directors awarded 9,000 shares of common stock to
certain employees, of which 1,100 vested immediately. The remaining 7,900 shares
of common stock were to vest after the completion of two years of service ending
December 1999, at
F-65
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
May 31, 1999
11. Stockholder Equity (continued)
Common Stock (continued)
which time the earned shares of common stock would be issued. In January 1999,
one employee was terminated by the Company, and the related 500 shares were
forfeited and canceled. Compensation cost was measured at the date of the award
based on the formula price, which the Company believed approximated fair value,
used in the restrictive stock agreement and the employee stock purchase program.
This cost was to be amortized to expense over the applicable vesting period in
which the award was earned. In connection with the exchange of shares with
Primary Network Holdings, Inc. (PNH) (Note 14), all 7,400 remaining shares
became fully vested on March 31, 1999. Also in March 1999, the Company awarded
51,841 shares of common stock to certain employees, all of which vested
immediately. Compensation expense for these awards is measured based on
estimated fair value at the date of the award. For the period January 1, 1999 to
May 31, 1999, the Company recognized compensation expense of $390,615, which
includes $31,533 related to the amortization of the 7,400 shares of common
stock. Finally in March 1999, the Company issued 422,693 options to employees at
an exercise price of $15 per share. As the exercise price of the options was
above fair value at the grant date, no compensation expense was recorded by the
Company related to these options. Effective May 31, 1999, all of these options,
as well as the option to purchase 10,000 shares granted in December 1997, were
canceled. No other options were granted, forfeited, or expired during 1999, and
no options were outstanding at May 31, 1999.
Under SFAS No. 123, the Minimum Value method may be used by nonpublic companies
to value an option. This includes estimating the risk-free interest rate, the
expected dividend yield, and the life of the options. Based on this option
valuation model, the weighted average fair value of options granted and the
total pro forma compensation expense to be disclosed as prescribed under SFAS
No. 123 for the period January 1, 1999 to May 31, 1999 are immaterial.
During the period January 1, 1999 to May 31, 1999, the Company sold 214,298
shares of common stock for $2,246,172. These stockholders are subject to the
restrictive stock agreement disclosed above.
Contributions to Capital
During the five months ended May 31, 1999, an affiliate provided $233,162 of
services to the Company at no cost. The Company recorded these transactions as
additional capital contributions.
F-66
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
May 31, 1999
12. Discontinued Operations
On January 1, 1999, the Board of Directors approved a decision to discontinue
the Company's Web development division. On May 19, 1999, the Company sold that
line of business to an affiliate. Sales of the Web development division for the
period January 1, 1999 to May 19, 1999 were $172,414. The Company sold all
assets of the division, with the exception of accounts receivable totaling
$125,020 as of May 31, 1999, for an amount equaling their net book value of
approximately $7,000 as of the disposal date and a 3 percent royalty of future
Web development gross revenues of the affiliate for two years.
13. Segment Information
The Company has two reportable segments, Internet and Retail, which are separate
operating units that offer different products and services and are managed
accordingly. Performance of each segment is evaluated by management based on
income (loss) from continuing operations. Transactions between segments are
reported at fair value and the accounting polices of the segments are the same
as those in Note 1.
The Internet segment provides full service access to the Internet for corporate
and residential customers including dial-up and dedicated services and
activities related to setup and installation, selling equipment, and software.
The Retail segment sells cellular and other wireless communication products,
including phones, pagers, and related accessories.
The following segment information is as of May 31, 1999 or for the five months
then ended:
<TABLE>
<CAPTION>
Internet Retail Total
------------------------------------------------
<S> <C> <C> <C>
Revenues from external customers $2,315,160 $518,124 $2,833,284
Depreciation and amortization 168,923 17,016 185,939
Stock-based compensation expense 390,615 - 390,615
Interest expense 15,655 3,503 19,158
Loss from continuing operations (329,157) (352,749) (681,906)
Loss from disposal of discontinued Web
development division (Note 12) (81,785) - (81,785)
Net loss (410,942) (352,749) (763,691)
Segment assets 4,093,931 347,099 4,441,030
Capital expenditures 145,672 1,887 147,559
</TABLE>
F-67
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
May 31, 1999
14. Subsequent Events
Effective the close of business on May 31, 1999, the Company executed a plan of
reorganization whereby all common stockholders of the Company exchanged each of
their shares for 16.67 shares in PNH, a newly formed holding company. This
transaction terminated the restrictive stock agreement (see Note 11) as of that
date. In addition, all of the common stockholders of BroadSpan (see Note 5), a
Competitive Local Exchange Carrier, exchanged each of their shares for 13.227
shares in PNH. This reorganization will allow PNH, of which the Company and
BroadSpan will be wholly owned subsidiaries, to cross-sell Internet access and
cellular services to its local and long distance telephone customers.
Additionally, on June 1, 1999, PNH raised a combination of debt and equity
proceeds approximating $53,000,000 from various investors. The proceeds are
expected to be used to acquire ISPs, develop and offer DSL technology, and grow
revenues through aggressive marketing.
On June 17, 1999, the Company purchased all outstanding common stock of Q
Networks, Inc. for approximately $5,000,000.
On June 21, 1999, the Company purchased the Internet dial-up customer base and
certain assets of CySource Inc. for approximately $650,000.
On August 6, 1999, the Company purchased substantially all of the assets of
Inlink Communications Company for approximately $4,700,000.
F-68
<PAGE>
Financial Statements
CDM On-Line, Inc.
Years ended December 31, 1997 and 1998
with Report of Independent Auditors
F-69
<PAGE>
CDM On-Line, Inc.
Financial Statements
Years ended December 31, 1997 and 1998
Contents
Report of Independent Auditors..............................................F-71
Financial Statements
Balance Sheets..............................................................F-72
Statements of Operations....................................................F-73
Statements of Stockholders' Deficit.........................................F-74
Statements of Cash Flows....................................................F-75
Notes to Financial Statements...............................................F-76
F-70
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
CDM On-Line, Inc.
We have audited the accompanying balance sheets of CDM On-Line, Inc. as of
December 31, 1997 and 1998, and the related statements of operations,
stockholders' deficit, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CDM On-Line, Inc. at December
31, 1997 and 1998, and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States.
Ernst & Young LLP
March 22, 1999
St. Louis, Missouri
F-71
<PAGE>
CDM On-Line, Inc.
Balance Sheets
<TABLE>
<CAPTION>
December 31
1997 1998
--------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 148,527 $ 300,580
Accounts receivable, less allowance for doubtful accounts
of $27,604 in 1997 and $89,085 in 1998 279,934 296,190
Due from affiliates 29,172 268,756
Inventory 109,335 130,534
Other current assets 3,442 41,118
--------------------------------------------
Total current assets 570,410 1,037,178
Property and equipment, net 521,771 452,646
Other assets 171,380 174,105
--------------------------------------------
$ 1,263,561 $ 1,663,929
============================================
Liabilities and stockholders' deficit
Current liabilities:
Line of credit $ - $ 20,000
Accounts payable 204,568 372,564
Accrued expenses 166,815 185,042
Unearned revenues 213,938 390,548
Due to affiliates 1,461,998 899,509
--------------------------------------------
Total current liabilities 2,047,319 1,867,663
Stockholders' deficit:
Common stock, $.15 par value, 2,000,000 shares
authorized, 1,197,745 and 1,222,406 shares issued in
1997 and 1998, respectively 179,662 183,361
Additional paid-in capital 1,972,157 3,841,839
Accumulated deficit (2,935,577) (4,169,695)
--------------------------------------------
(783,758) (144,495)
Treasury stock at cost - (59,239)
--------------------------------------------
(783,758) (203,734)
--------------------------------------------
$ 1,263,561 $ 1,663,929
============================================
</TABLE>
See accompanying notes.
F-72
<PAGE>
CDM On-Line, Inc.
Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1997 1998
--------------------------------------------
<S> <C> <C>
Revenues:
Access revenues $ 1,496,237 $3,216,463
Retail revenues 549,997 883,380
Other revenues 529,318 695,728
--------------------------------------------
2,575,552 4,795,571
Costs and expenses:
Costs of access revenues 701,439 1,184,433
Costs of retail revenues 371,235 529,992
Costs of other revenues 245,273 482,580
Operations and customer support 494,292 671,592
Sales and marketing 645,827 745,067
General and administrative 661,481 1,189,052
Retail store expenses 773,634 1,013,136
Depreciation and amortization 233,073 263,063
--------------------------------------------
4,126,254 6,078,915
--------------------------------------------
Loss from operations (1,550,702) (1,283,344)
Other income (expense):
Interest expense - affiliates (83,131) (189,175)
Interest expense (675) (1,805)
Other income, net 44,331 4,314
--------------------------------------------
Loss from continuing operations (1,590,177) (1,470,010)
Income from operations of discontinued Web development
division (Note 12) 147,374 235,892
--------------------------------------------
Net loss $(1,442,803) $ (1,234,118)
============================================
</TABLE>
See accompanying notes.
F-73
<PAGE>
CDM On-Line, Inc.
Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
Additional
Common Stock Paid-In Accumulated Treasury Stock
Shares Amount Capital Deficit Shares Amount
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 1,197,745 $179,662 $ 916,063 $(1,492,774) - $ -
Net loss - - - (1,442,803) - -
Forgiveness of advances by stockholders
and contribution of services - - 1,056,094 - - -
----------------------------------------------------------------------------------
Balance at December 31, 1997 1,197,745 179,662 1,972,157 (2,935,577) - -
Net loss - - - (1,234,118) - -
Forgiveness of advances by stockholders
and contribution of services - - 1,548,166 - - -
Sale of stock to employees 19,967 2,995 238,007 - - -
Sale of stock to employees under employee
stock purchase arrangement
3,594 539 37,517 - - -
Stock awards to employees 1,100 165 9,889 - - -
Amortization of vested stock - - 36,103 - - -
Common stock purchased for treasury
- - - - 5,393 (59,239)
----------------------------------------------------------------------------------
Balance at December 31, 1998 1,222,406 $183,361 $3,841,839 $(4,169,695) 5,393 $(59,239)
==================================================================================
</TABLE>
See accompanying notes.
F-74
<PAGE>
CDM On-Line, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1997 1998
--------------------------------------------
<S> <C> <C>
Operating activities
Net loss $(1,442,803) $(1,234,118)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 233,073 263,063
Stock-based compensation expense - 46,157
Allowance for doubtful accounts 1,274 61,481
Gain on disposal of equipment to affiliates (29,539) -
Changes in operating assets and liabilities:
Accounts receivable (57,782) (77,737)
Due from affiliates (23,958) (87,412)
Inventory (91,605) (21,199)
Other current assets 9,477 (37,676)
Other assets (7,095) (2,725)
Accounts payable 114,399 167,996
Accrued expenses 68,241 18,227
Unearned revenues 143,518 176,610
--------------------------------------------
Net cash used in operating activities (1,082,800) (727,333)
Investing activities
Advances to affiliates - (152,172)
Purchases of property and equipment (340,899) (193,938)
Proceeds from disposal of equipment to affiliates 81,718 -
Investments in and advances to unconsolidated subsidiaries
(60,000) -
--------------------------------------------
Net cash used in investing activities (319,181) (346,110)
Financing activities
Bank overdraft (4,437) -
Net proceeds under line of credit - 20,000
Purchase of common stock held in treasury - (59,239)
Due to affiliates 1,554,945 985,677
Proceeds from issuance of common stock - 279,058
--------------------------------------------
Net cash provided by financing activities 1,550,508 1,225,496
--------------------------------------------
Net increase in cash and cash equivalents 148,527 152,053
Cash and cash equivalents at beginning of year - 148,527
--------------------------------------------
Cash and cash equivalents at end of year $ 148,527 $ 300,580
============================================
</TABLE>
See accompanying notes.
F-75
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements
December 31, 1998
1. Organization
CDM On-Line, Inc. (the "Company") is a local provider of Internet access and
other Internet-related services in St. Louis and Kansas City, Missouri. In
addition, the Company serves as an authorized agent of Southwestern Bell Mobile
Systems and operates cellular and other wireless communication products retail
stores in the St. Louis metropolitan area. The Company was organized on
September 23, 1994 (Inception) and began providing Internet services in July
1995. The Company commenced its retail operations in November 1996. The
Company's targeted markets include residential and business customers in
Missouri.
2. Summary of Significant Accounting Policies
Basis of Presentation
The Company has incurred losses since its inception, has had negative cash flows
from operations in all periods, and has working capital and stockholders' equity
deficiencies. Management's operational and financing plans to address these
conditions include but are not limited to obtaining additional equity and debt
financing, continuing investments in its network infrastructure to increase its
network efficiency and capacity to serve additional subscribers, and employing
marketing strategies to increase its subscriber base. Subsequent to December 31,
1998, the Company raised approximately $2,300,000 in cash from the sale of
common stock. Further, the Company's stockholders have agreed to provide the
Company with the necessary funds to meet all of its working capital needs during
1999.
The online services and Internet markets are highly competitive. The Company
believes that existing competitors, Internet-based services, Internet service
providers, Internet directory services, and telecommunications companies are
likely to enhance their service offerings, resulting in greater competition for
the Company. The competitive conditions could have the following effects:
require additional pricing programs, increase spending on marketing, limit the
Company's ability to expand its subscriber base, and result in increased
attrition in the existing subscriber base. The accompanying financial statements
have been prepared on a basis which contemplates the realization of the assets
and satisfaction of liabilities in the normal course of business.
F-76
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
December 31, 1998
2. Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments with a maturity of
three months or less at the time of purchase to be cash equivalents.
Property and Equipment
Property and equipment, including leasehold improvements, are stated at cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives ranging from 18 months to 15 years. Leasehold improvements are
amortized over the lesser of the related lease term or the useful life of the
assets.
Inventory
Inventory consists of cellular and other wireless communication products and
accessories and is stated at the lower of cost (specific identification basis)
or market.
Impairment of Long-Lived Assets
At each balance sheet date, management determines whether any property or
equipment or any other assets have been impaired based on the criteria
established in Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of. The Company made no adjustments to the carrying values of its
assets during the years ended December 31, 1997 and 1998.
Stock Compensation
The Company accounts for its stock-based compensation plans and arrangements
using the intrinsic value method prescribed by Accounting Principles Board
Opinion (APB) No. 25, Accounting for Stock Issued to Employees.
F-77
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
December 31, 1998
2. Summary of Significant Accounting Policies (continued)
Stock Compensation (continued)
SFAS No. 123, Accounting for Stock-Based Compensation, requires that companies
electing to continue using the intrinsic value method make pro forma disclosures
of net income as if the fair value-based method of accounting had been applied.
The pro forma effect of using the fair value-based method to account for its
stock-based compensation would have resulted in no difference to the net loss
reported by the Company in 1997 and 1998.
Revenue Recognition
Access revenues: Internet customers are billed in advance for the periods for
which Internet services are provided. The Company defers recognition of revenue
on these advance billings and amortizes the amounts to revenue on a
straight-line basis as the services are provided.
Retail revenues: These revenues consist primarily of retail product sales of
cellular and other wireless products, such as phones, pagers, and related
accessories. Such sales are recorded upon customer purchase. The Company also
generates revenues from activation commissions from cellular carriers for each
new cellular phone subscription sold by the Company. Revenue from such
commissions is recorded upon customer subscription. New subscription activation
commissions are fully refundable if the subscriber cancels service within a
certain minimum period of continuous active service (generally 180 days).
Customers generally sign a service agreement that requires a customer deposit
which is forfeited in case of early cancellation. At December 31, 1997 and 1998,
the Company's allowance for accounts receivable includes an amount for estimated
cancellation losses, net of deposit forfeitures.
The Company generally receives monthly residual income from the cellular service
providers based on a percentage of actual phone usage by subscribers. Revenue
from residual income is recorded as the cellular service is provided. Revenue
from prepaid pager service is deferred and recognized over the period service is
provided, usually annually. Revenue from monthly installment pager service
contracts is recorded as received.
Other revenues: Other revenues consist of setup and installation fees and
selling equipment and software.
F-78
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
December 31, 1998
2. Summary of Significant Accounting Policies (continued)
Costs of Revenues
Costs of access revenues primarily consist of telecommunications expenses
inherent in the network infrastructure, including fees paid for the lease of the
Company's backbone. Costs of retail revenues consist of the costs of cellular
and other wireless communication products and accessories purchased for resale.
Costs of other revenues primarily consist of the costs of equipment and software
purchased for resale.
Advertising Costs
All advertising and promotion costs are expensed as incurred. During the years
ended December 31, 1997 and 1998, the Company incurred advertising costs of
approximately $330,900 and $200,300, respectively.
Income Taxes
The Company is treated as an S Corporation under the provisions of the Internal
Revenue Code, whereby the Company's income or loss is allocated to the
individual stockholders for federal income tax purposes. While the Company is
not subject to federal income taxes, it is subject to certain state and local
taxes, which were not significant for the periods presented.
If the Company had been subject to federal and certain state income taxes for
the two year period ended December 31, 1998, the Company would have been in a
net deferred tax asset position which would have been fully offset by a
valuation allowance. Any tax benefit or provision for those years also would
have been fully offset by changes in the deferred tax asset valuation allowance.
Therefore, unaudited pro-forma income tax information is not presented in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes," as if the Company had been subject to federal and certain
state income taxes.
Financial Instruments and Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and accounts receivable. The cash is held
by a high-credit-quality financial institution. For accounts receivable, the
Company performs ongoing credit evaluations of the financial condition of its
customers and does not require collateral. The Company maintains reserves for
credit losses, and such losses have been within management's expectations. The
concentration of credit risk is mitigated by the
F-79
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
December 31, 1998
2. Summary of Significant Accounting Policies (continued)
Financial Instruments and Concentration of Credit Risk (continued)
large customer base. The net carrying amount of the receivables approximates
their fair value.
3. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31
1997 1998
------------------- --------------------
<S> <C> <C>
Computer equipment $ 732,455 $ 777,521
Software 22,004 49,721
Furniture, fixtures, and office equipment 21,166 26,213
Land, building, and leasehold improvements 55,919 169,529
Vehicles 42,413 44,913
------------------- --------------------
873,957 1,067,897
Less accumulated depreciation and amortization (352,186) (615,251)
------------------- --------------------
$ 521,771 $ 452,646
=================== ====================
</TABLE>
4. Other Assets
Other assets consist of the following:
<TABLE>
<CAPTION>
December 31
1997 1998
------------------- --------------------
<S> <C> <C>
Investment in Interchange Technologies, Inc. $ 160,000 $ 160,000
Other non-current assets 11,380 14,105
------------------- --------------------
$ 171,380 $ 174,105
=================== ====================
</TABLE>
F-80
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
December 31, 1998
5. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31
1997 1998
------------------- --------------------
<S> <C> <C>
Accrued payroll and related expenses $ 124,849 $ 150,358
Other accrued expenses 41,966 34,684
------------------- --------------------
$ 166,815 $ 185,042
=================== ====================
</TABLE>
6. Related Party Transactions
Affiliates include officers, employees, and other corporations and partnerships
that are substantially or partially owned by officers and stockholders of the
Company. The significant affiliates include CBC Distribution and Marketing,
Inc., CDM Fantasy Sports, Inc., CDM Properties Management, L.L.C., and Primary
Communications, Inc.
As of December 31, 1997 and 1998, amounts due from affiliates consist of the
following:
December 31
1997 1998
-------------------------------
Advances to affiliates $ - $152,172
Accounts receivable - trade affiliates 29,172 116,584
-------------------------------
$29,172 $268,756
===============================
The advances to affiliates are unsecured, are due on demand, and bear interest
at 12 percent per annum, which is payable upon repayment of the advances.
As of December 31, 1997 and 1998, the due to affiliates was $1,461,998 and
$899,509, respectively, and consisted solely of borrowings from affiliates. Such
advances are unsecured, are due on demand, and bear interest in 1997 at rates
ranging from 5.63 percent to 6.07 percent and at 12 percent in 1998 as published
by the Internal Revenue Service.
Revenues derived from affiliates related to providing Internet access and other
services were approximately $217,000 and $378,000 in 1997 and 1998,
respectively. Expenses
F-81
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
December 31, 1998
6. Related Party Transactions (continued)
and costs incurred to affiliates related to purchasing advertising and insurance
were approximately $51,000 and $53,000 in 1997 and 1998, respectively.
The Company leases office space under noncancelable operating leases from an
affiliate. The leases expire in August 2008, contain an option to renew for a
five-year term, and provide for additional rent related to the Company's share
of certain taxes and operating expenses. Rent expense associated with these
leases was $37,000 and $76,000 in 1997 and 1998, respectively, and such amounts
are included in the total rent expense disclosed in Note 9.
Future minimum lease payments under the noncancelable operating leases with the
affiliate at December 31, 1998 are as follows:
1999 $ 91,845
2000 91,847
2001 94,379
2002 97,189
2003 97,189
Thereafter 466,016
------------------
$938,465
==================
The Company leases certain network-related equipment on a month-to-month basis
from an affiliate. Rent expense for the equipment was approximately $157,000 in
1997 and $276,000 in 1998. Future minimum lease payments under the
month-to-month leasing arrangements are expected to be as follows: $279,656 in
1999, $214,310 in 2000, and $38,701 in 2001.
An affiliate provides the Company the use of its programmers, certain equipment,
payroll services and the administration of the 401(k) defined contribution plan.
All labor and administrative costs provided by the affiliate were expensed and
were $374,973 and $491,511 during the years ended December 31, 1997 and 1998,
respectively.
7. Line of Credit
The Company has a line of credit with a bank allowing borrowings of up to
$25,000. Interest is payable monthly at the bank's prime rate plus .5 percent
(8.25 percent at December 31, 1998). The principal balance and any unpaid
accrued interest are payable on November 20, 1999. The line is secured by
accounts receivable, inventory, and
F-82
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
December 31, 1998
7. Line of Credit (continued)
property and equipment and is personally guaranteed by certain stockholders.
Borrowings of $20,000 were outstanding against the line at December 31, 1998.
8. Employee Benefit Plan
Employees of the Company are eligible to participate in a defined contribution
401(k) profit sharing plan, sponsored by an affiliate, covering substantially
all eligible employees. The Company matches 100 percent of the first 6 percent
of compensation that employees contribute into the plan. Additional
contributions may be made to the plan at the discretion of Company management.
Company matching amounts of employee contributions for the years ended December
31, 1997 and 1998, were $39,324 and $50,603, respectively.
9. Commitments
Lease Commitments
The Company leases vehicles and office and retail space under noncancelable
operating lease agreements. The leases for office and retail space generally
include renewal options and require the Company to pay a portion of the expenses
for common areas, including maintenance, real estate taxes, and other expenses.
Rent expense under these operating leases for the years ended December 31, 1997
and 1998, was $140,556 and $216,719, respectively.
Future minimum lease payments under noncancelable operating leases with initial
or remaining lease terms in excess of one year (including lease commitments to
affiliates disclosed in Note 6) are as follows at December 31, 1998:
1999 $ 240,366
2000 232,304
2001 230,518
2002 134,305
2003 97,189
Thereafter 466,016
----------------------
$1,400,698
======================
F-83
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
December 31, 1998
9. Commitments (continued)
Backbone Agreement
The Company has agreements with its principal Internet service provider (ISP)
which require payment of minimum monthly Internet access and other charges of
$7,350 under one agreement through April 1999 and $6,300 under another agreement
through March 1999. Additional monthly charges are incurred for the use of
capacity above the amounts contracted in the agreements. The agreements
automatically renew unless the ISP or Company terminates them, as described in
the agreements. Expenses incurred under these agreements were $154,051 in 1997
and $218,689 in 1998.
10. Stockholder Equity
Restrictive Stock Agreement
Under the terms of the 1994 restrictive stock agreement, as subsequently amended
in November 1996, certain employees/stockholders are restricted in their ability
to sell common stock of the Company. Specifically, if a stockholder desires to
sell Company common stock, written consent of the sale must be obtained from the
Company. In the absence of written consent, the Company possesses a "right of
first refusal" under which the employees/stockholders must first offer the stock
for sale to the Company before it may be sold to another party. The purchase
price for common stock purchased under the right of first refusal is based on
book value. The Company also has the right to purchase common stock from an
employee under voluntary or involuntary termination, as defined. The purchase
price for a voluntary termination is the book value, while for involuntary
termination the purchase price is a formula price defined in the agreement. If
the Company decides not to exercise its right of first refusal or right to
purchase stock in the event of termination, each stockholder has the right for a
certain period of time to purchase such common stock at the same price and terms
as the Company's rights. The restrictive stock agreement also obligates the
Company to repurchase, at a formula price, all of the stock owned by an
employee/stockholder in the event of death.
Common Stock
In December 1997, the Board of Directors approved the implementation of an
employee stock purchase program whereby employees eligible for the 401(k)
defined contribution plan are also eligible to purchase Company stock through
payroll withholdings. Purchases of Company stock are made at the end of each
quarter at a price determined by a formula, essentially based on multiples of
sales and certain other factors. In 1998, employees purchased 3,594 shares of
stock through the stock purchase program for
F-84
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
December 31, 1998
10. Stockholder Equity (continued)
Common Stock (continued)
$38,056. Employees may sell and the Company is obligated to buy common stock
purchased under the program at the formula price in the quarter in which the
common stock is sold. Repurchased shares are carried as treasury stock, at cost.
In December 1997, the Company granted an officer an option to purchase 10,000
shares of common stock at an exercise price of $15 per share. The option vested
immediately and expires five years from the grant date.
In January 1998, the Board of Directors awarded 9,000 shares of common stock to
certain employees, of which 1,100 vested immediately. The remaining 7,900 shares
of common stock vest after the completion of two years of service in December
1999, at which time the earned shares of common stock will be issued.
Compensation cost is measured at the date of the award based on the formula
price, which approximates fair value, used in the restrictive stock agreement
and the employee stock purchase program, and such cost is amortized as expense
over the period in which the award is earned over the applicable vesting period.
In 1998, the Company recognized compensation expense of $46,157, which includes
$36,103 related to the amortization of 7,900 shares of common stock.
Contributions to Capital
In 1997 and 1998, an affiliate distributed to its stockholders, as a tax-free
distribution of its previously taxed earnings as an S Corporation, a portion of
its amount due from the Company. The affiliate's stockholders, who are also
stockholders of the Company, simultaneously made capital contributions to the
Company for the amount distributed to them. The effect of these transactions is
to reduce the amount due to the affiliate and increase additional paid-in
capital by $681,121 in 1997 and $1,056,655 in 1998. In addition the affiliate
provided $374,973 and $491,511 of services to the Company at no cost in 1997 and
1998, respectively. The Company recorded these transactions as additional
capital contributions.
11. Segment Information
The Company has two reportable segments, Internet and Retail, which are separate
operating units that offer different products and services and are managed
accordingly. Performance of each segment is evaluated by management based on
income (loss) from continuing operations. Transactions between segments are
reported at fair value and the accounting polices of the segments are the same
as those in Note 1.
F-85
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
December 31, 1998
11. Segment Information (continued)
The Internet segment provides full service access to the Internet for corporate
and residential customers including dial-up and dedicated services and
activities related to setup and installation, selling equipment, and software.
The Retail segment sells cellular and other wireless communication products,
including phones, pagers, and related accessories.
The following segment information is as of December 31, or for the year then
ended:
<TABLE>
<CAPTION>
1997
Internet Retail Total
------------------------------------------------------
<S> <C> <C> <C>
Revenues from external customers $ 2,025,555 $ 549,997 $ 2,575,552
Depreciation and amortization 221,879 11,194 233,073
Stock-based compensation - - -
Interest expense 65,910 17,896 83,806
Loss from continuing operations (915,232) (674,945) (1,590,177)
Income from discontinued operations
- Web development (Note 13) 147,374 - 147,374
Net loss (767,858) (674,945) (1,442,803)
Segment assets 906,145 357,416 1,263,561
Capital expenditures 218,953 121,946 340,899
1998
Internet Retail Total
------------------------------------------------------
Revenues from external customers $ 3,912,191 $ 883,380 $ 4,795,571
Depreciation and amortization 224,598 38,465 263,063
Stock-based compensation 46,157 - 46,157
Interest expense 155,799 35,181 190,980
Loss from continuing operations (611,808) (858,202) (1,470,010)
Income from discontinued operations
- Web development (Note 13) 235,892 - 235,892
Net loss (375,916) (858,202) (1,234,118)
Segment assets 1,170,156 493,773 1,663,929
</TABLE>
F-86
<PAGE>
CDM On-Line, Inc.
Notes to Financial Statements (continued)
December 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Capital expenditures 34,033 159,905 193,938
</TABLE>
12. Subsequent Events
On January 1, 1999, the Board of Directors approved a decision to discontinue
the Company's Web development division. The results of the Web development
division have been reported separately as discontinued operations in the
statement of operations. Sales for the Web development division for the years
ended December 31, 1997 and 1998 were $477,311 and $651,350, respectively.
Management expects the disposal to occur in the second quarter of 1999 and that
the gain or loss on disposal of this division will not be material.
Since January 1, 1999 through March 22, 1999, the Company has granted 51,841
shares of common stock to certain employees and sold 214,298 shares of common
stock, raising proceeds of $2,246,172
F-87
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF OFFICERS AND DIRECTORS
The articles of incorporation of Mpower provides that Mpower
shall indemnify any director or officer for any liability and legal expenses,
including attorney's fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him arising out of his status or actions as
a director or officer if he acted in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of Mpower, and
had no reasonable cause to believe his conduct was unlawful.
The by-laws of Mpower state that, except as otherwise provided
in the Mpower by-laws, Mpower shall indemnify any officer or director in the
event he is made a party to a proceeding because he is or was a director or
officer against liability incurred by him in the proceeding if he acted in good
faith and in a manner he believed to be in or not opposed to the best interests
of Mpower and, in the case of any criminal proceeding, he had no reasonable
cause to believe his conduct was unlawful. The Mpower by-laws further state that
Mpower shall not indemnify any officer or director in connection with a
proceeding in which such officer or director was adjudged liable to Mpower,
unless and only to the extent the court in which the proceeding was brought or
other court of competent jurisdiction determines that the officer or director is
fairly and reasonably entitled to indemnity for such expenses as the court deems
proper.
The Mpower by-laws further provide that Mpower shall not
indemnify any officer or director unless a separate determination has been made
that indemnification of such officer or director is permissible because he has
met the standard of conduct set forth in the Mpower by-laws, unless ordered by a
court or advanced pursuant to the section of the Mpower by-laws concerning
advancement of expenses; provided, however, that regardless of the result or
absence of such determination, to the extent that such officer or director has
been successful on the merits or otherwise, in the defense to an proceeding by
or in right of Mpower to which he was a party, Mpower shall indemnify such
officer or director against any liability incurred by him in connection with
such proceeding.
The determination required to be made by the Mpower by-laws
shall be made, at the election of the board of directors of Mpower:
1. by the board of directors of Mpower by majority vote of a
quorum consisting of directors not at the time parties to
the proceeding;
2. by special independent legal counsel:
(a) selected by the board of directors in the manner
prescribed in subparagraph 1 immediately above; or
II-1
<PAGE>
(b) if a quorum of the board of directors cannot be
obtained under subparagraph 1 immediately above,
selected by a majority vote of the full board of
directors (in which selection directors who are
parties may participate); or
3. by the shareholders of Mpower, provided that shares owned
by or voted under the control of directors or officers
who are at the time parties to the proceeding may not be
voted on the determination.
The Mpower by-laws further provide that Mpower shall pay for
or reimburse the reasonable expenses incurred by an officer or director as a
party to a proceeding in advance of final disposition of the proceeding if the
officer or director furnishes to Mpower a written undertaking to repay any
advances if it is ultimately determined that he is not entitled to any
indemnification under the Mpower by-laws or otherwise.
The Mpower by-laws also provide that the rights of an officer
or director to indemnification set forth in the Mpower by-laws shall be in
addition to any other rights with respect to indemnification, advancement of
expenses or otherwise that such officer or director may be entitled to under
Nevada law.
Both the Mpower articles of incorporation and by-laws provide
that it is the intention of Mpower to provide the indemnification of officers
and directors to the fullest extent provided by Nevada law.
With certain limitations, Sections 78.7502(1) and (2) of the
Nevada Revised Statutes permit a corporation to indemnify a director or officer
who is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses,
including attorneys fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with the action, suit or
proceeding if he acted in good faith and in a manner which he reasonably
believed to be in or not opposed to the interest of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful.
The Mpower articles of incorporation provide that the personal
liability of all directors and officers of Mpower to any person shall be
eliminated or limited to the maximum extent allowed by Nevada law except that
directors and officers shall be liable for any acts or omissions which involve
intentional misconduct, fraud or a knowing violation of law, or the payment of
dividends in violation of Section 78.300 of the Nevada Revised Statutes.
As permitted by Section 78.752 of the Nevada Revised Statutes,
Mpower maintains liability insurance covering directors and officers.
II-2
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are exhibits to the Registration
Statement.
Exhibit
Number Description of Document
------ -----------------------
*2.1 Agreement and Plan of Merger, dated as of April 17, 2000, among Primary
Network Holdings, Inc., Mpower Communications Corp. and Mpower Merger
Sub, Inc. (attached as Annex A to the Joint Proxy
Statement/Prospectus).
*4.1 Shareholders Agreement among Mpower Communications Corp. and Brian
Matthews, Carol Matthews, Charles Wiegert, Welton Brison, Tom
Hesterman, Richard Phillips, John Alden, EC Primary LLC, Quantum
Emerging Growth Partners, C.V. and TGV Partners, dated as of April 17,
2000 (attached as Annex C to the Proxy Statement/Prospectus).
*4.2 Letter Agreement among Mpower Communications Corp. and EC Primary,
L.P., Quantum Emerging Growth Partners C.V., Ravich Revocable Trust of
1989, The Ravich Children Permanent Trust, U.S. Bancorp Libra, and
TGV/Primary Investors LLC, dated as of April 17, 2000 (attached as
Annex D to the Proxy Statement/Prospectus).
*4.3 Indenture, dated as of March 24, 2000, between MGC Communications,
Inc., Mpower Holding Corporation and HSBC Bank USA, as trustee.
**5.1 Opinion of Lionel, Sawyer & Collins as to the legality of the
securities being registered.
**8.1 Opinion of Shearman & Sterling as to the material United States federal
income tax consequences of the merger.
**8.2 Opinion of Milbank, Tweed, Hadley & McCloy, LLP as to the material
United States federal income tax consequences of the merger.
*10.1 Shareholders Agreement among Mpower Communications Corp. and Brian
Matthews, Carol Matthews, Charles Wiegert, Welton Brison, Tom
Hesterman, Richard Phillips, John Alden, EC Primary LLC, Quantum
Emerging Growth Partners, C.V. and TGV Partners, dated as of April 17,
2000. (attached as Annex C to the Proxy Statement/Prospectus).
*23.1 Consent of Arthur Anderson LLP.
*23.2 Consent of Ernst & Young LLP.
**23.3 Consent of Lionel, Sawyer & Collins (included in Exhibit 5.1 to this
Registration Statement).
**23.4 Consent of Shearman & Sterling (included in Exhibit 8.1 to this
Registration Statement).
**23.5 Consent of Milbank, Tweed, Hadley & McCloy, LLP (included in Exhibit
8.2 of this Registration Statement).
*23.6 Consent of Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
*24.1 Powers of Attorney. (included in the signature page of the Registration
Statement).
**99.1 Form of proxy card for the Special Meeting of stockholders of Primary
Network.
**99.2 Form of Letter of Transmittal.
*99.3 Primary Network's Chairman's letter to stockholders.
*99.4 Notice to stockholders of Primary Network.
- ----------------
* Filed herewith.
** To be filed by amendment.
II-3
<PAGE>
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the Registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) (1) The undersigned Registrant hereby undertakes as
follows: that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that
is filed pursuant to the paragraph immediately preceding, or (ii) that purports
to meet the requirements of section 10(a)(3) of the Securities Act and is used
in connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the Registration Statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions referred to in
Item 20 above, or otherwise, the Registrant has been advised that in the opinion
of the SEC such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
(d) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference into this Joint Proxy
Statement/Prospectus pursuant to Items 4, 10(b), 11 or 13 of Form S-4, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request.
II-4
<PAGE>
(e) The undersigned Registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning a transaction,
and the company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
SIGNATURES
Pursuant to the requirements of the Securities Act, MGC
Communications, Inc. certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-4 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized on the 10th day of May, 2000.
MGC COMMUNICATIONS, INC.
By /s/ Rolla P. Huff
-------------------------------
Name: Rolla P. Huff
Title: Chief Executive Officer
and President
POWER OF ATTORNEY
The undersigned Directors and Officers of MGC Communications,
Inc. hereby constitute and appoint Rolla P. Huff and Kent F. Heyman as true and
lawful attorney-in-fact for the undersigned, with full power of substitution and
resubstitution, for and in the name, place and stead of the undersigned, to sign
and file with the Securities and Exchange Commission under the Securities Act of
1933, as amended, any and all amendments (including post-effective amendments)
and exhibits to this Registration Statement, any related registration statement
and its amendments and exhibits filed pursuant to Rule 462(b) under the
Securities Act and any and all applications and other documents to be filed with
the Securities and Exchange Commission pertaining to the registration of the
securities covered hereby or under any related registration statement or any
amendment hereto or thereto, with full power and authority to do and perform
each and every act and thing requisite and necessary or desirable, hereby
ratifying and confirming all that such attorney-in-fact or its substitute shall
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Rolla P. Huff Chief Executive Officer, President and May 9, 2000
- ------------------------------------ Director
Rolla P. Huff (Principal Executive Officer)
/s/ Michael R. Daley Executive Vice President and Chief May 9, 2000
- ------------------------------------ Financial Officer
Michael R. Daley (Principal Financial Officer)
/s/ Frank C. Szabo Controller May 9, 2000
- ------------------------------------ (Principal Accounting Officer)
Frank C. Szabo
/s/ Maurice J. Gallagher, Jr. Chairman of the Board of Directors May 9, 2000
- ------------------------------------
Maurice J. Gallagher, Jr.
/s/ David Kronfeld Director May 10, 2000
- ------------------------------------
David Kronfeld
/s/ Mark J. Masiello Director May 10, 2000
- ------------------------------------
Mark J. Masiello
/s/ Thomas Neustaetter Director May 10, 2000
- ------------------------------------
Thomas Neustaetter
/s/ Mark Pelson Director May 10, 2000
- ---------------------------
Mark Pelson
</TABLE>
II-6
<PAGE>
Exhibit Index
Exhibit
Number Description of Document
*2.1 Agreement and Plan of Merger, dated as of April 17, 2000, among Primary
Network Holdings, Inc., Mpower Communications Corp. and Mpower Merger
Sub, Inc. (attached as Annex A to the Joint Proxy
Statement/Prospectus).
*4.1 Shareholders Agreement among Mpower Communications Corp. and Brian
Matthews, Carol Matthews, Charles Wiegert, Welton Brison, Tom
Hesterman, Richard Phillips, John Alden, EC Primary LLC, Quantum
Emerging Growth Partners, C.V. and TGV Partners, dated as of April 17,
2000 (attached as Annex C to the Proxy Statement/Prospectus).
*4.2 Letter Agreement among Mpower Communications Corp. and EC Primary,
L.P., Quantum Emerging Growth Partners C.V., Ravich Revocable Trust of
1989, The Ravich Children Permanent Trust, U.S. Bancorp Libra, and
TGV/Primary Investors LLC, dated as of April 17, 2000 (attached as
Annex D to the Proxy Statement/Prospectus).
*4.3 Indenture, dated as of March 24, 2000, between MGC Communications,
Inc., Mpower Holding Corporation and HSBC Bank USA, as trustee.
**5.1 Opinion of Lionel, Sawyer & Collins as to the legality of the
securities being registered.
**8.1 Opinion of Shearman & Sterling as to the material United States federal
income tax consequences of the merger.
**8.2 Opinion of Milbank, Tweed, Hadley & McCloy, LLP as to the material
United States federal income tax consequences of the merger.
*10.1 Shareholders Agreement among Mpower Communications Corp. and Brian
Matthews, Carol Matthews, Charles Wiegert, Welton Brison, Tom
Hesterman, Richard Phillips, John Alden, EC Primary LLC, Quantum
Emerging Growth Partners, C.V. and TGV Partners, dated as of April 17,
2000. (attached as Annex C to the Proxy Statement/Prospectus).
*23.1 Consent of Arthur Anderson LLP.
*23.2 Consent of Ernst & Young LLP.
**23.3 Consent of Lionel, Sawyer & Collins (included in Exhibit 5.1 to this
Registration Statement).
**23.4 Consent of Shearman & Sterling (included in Exhibit 8.1 to this
Registration Statement).
**23.5 Consent of Milbank, Tweed, Hadley & McCloy, LLP (included in Exhibit
8.2 of this Registration Statement).
*23.6 Consent of Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
*24.1 Powers of Attorney (included in the signature page of the Registration
Statement).
**99.1 Form of proxy card for the Special Meeting of stockholders of Primary
Network.
**99.2 Form of Letter of Transmittal.
*99.3 Primary Network's Chairman's letter to stockholders.
*99.4 Notice to stockholders of Primary Network.
- ----------------
* Filed herewith.
** To be filed by amendment.
Exhibit 4.3
<PAGE>
EXHIBIT 4.3
================================================================================
MGC COMMUNICATIONS, INC.
MPOWER HOLDING CORPORATION
13% SENIOR NOTES DUE 2010
---------------------------------------------------------
-----------------
INDENTURE
Dated as of March 24, 2000
-----------------
-----------------
HSBC BANK USA
-----------------
Trustee
================================================================================
<PAGE>
CROSS-REFERENCE TABLE*
Trust Indenture
Act Section Indenture Section
310 (a)(1)...................................................... 7.10
(a)(2)..................................................... 7.10
(a)(3) .................................................... N.A.
(a)(4)..................................................... N.A.
(a)(5)..................................................... 7.10
(b) ....................................................... 7.10
(c) ....................................................... N.A.
311 (a) ........................................................ 7.11
(b) ....................................................... 7.11
(c) ....................................................... N.A.
312 (a)......................................................... 2.05
(b)........................................................ 10.03
(c) ....................................................... 10.03
313 (a) ........................................................ 7.06
(b)(1) .................................................... 7.06
(b)(2) .................................................... 7.06
(c) ....................................................... 7.06; 10.02
(d)........................................................ 7.06
314 (a) ........................................................ 4.03; 10.05
(b)........................................................ N.A.
(c)(1) .................................................... 10.04
(c)(2) .................................................... 10.04
(c)(3) .................................................... N.A.
(d)........................................................ N.A.
(e) ...................................................... 10.05
(f)........................................................ N.A.
315 (a)......................................................... N.A.
(b)........................................................ 7.05
(c) ...................................................... 7.01
(d)........................................................ N.A.
(e)........................................................ N.A.
316 (a)(last sentence) ......................................... N.A.
(a)(1)(A).................................................. N.A.
(a)(2) .................................................... N.A.
(b) ....................................................... 6.07
(c) ....................................................... 2.13
317 (a)(1) ..................................................... 6.08
(a)(2)..................................................... 6.09
(b) ....................................................... 2.04
318 (a)......................................................... N.A.
(b)........................................................ N.A.
(c)........................................................ 10.01
N.A. means not applicable.
*This Cross-Reference Table is not part of the Indenture.
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1
DEFINITIONS AND INCORPORATION
BY REFERENCE
Section 1.01. Definitions................................................ 1
Section 1.02. Other Definitions.......................................... 17
Section 1.03. Incorporation by Reference of Trust Indenture Act.......... 18
Section 1.04. Rules of Construction...................................... 18
ARTICLE 2
THE NOTES
Section 2.01. Form and Dating............................................ 18
Section 2.02. Execution and Authentication............................... 19
Section 2.03. Registrar and Paying Agent................................. 20
Section 2.04. Paying Agent to Hold Money in Trust........................ 20
Section 2.05. Holder Lists............................................... 21
Section 2.06. Transfer and Exchange...................................... 21
Section 2.07. Replacement Notes.......................................... 32
Section 2.08. Outstanding Notes.......................................... 32
Section 2.09. Treasury Notes............................................. 33
Section 2.10. Temporary Notes............................................ 33
Section 2.11. Cancellation............................................... 33
Section 2.12. Defaulted Interest......................................... 33
Section 2.13. Record Date................................................ 34
Section 2.14. CUSIP Number............................................... 34
ARTICLE 3
REDEMPTION AND CERTAIN REPURCHASES
Section 3.01. Notices to Trustee......................................... 34
Section 3.02. Selection of Notes to Be Redeemed.......................... 34
Section 3.03. Notice of Redemption....................................... 35
Section 3.04. Effect of Notice of Redemption............................. 36
Section 3.05. Deposit of Redemption Price................................ 36
Section 3.06. Notes Redeemed in Part..................................... 36
Section 3.07. Optional Redemption........................................ 37
Section 3.08. Mandatory Redemption....................................... 37
Section 3.09. Offer to Purchase With Excess Asset Sale Proceeds.......... 37
ARTICLE 4
COVENANTS
Section 4.01. Payment of Notes........................................... 39
Section 4.02. Maintenance of Office or Agency............................ 40
Section 4.03. Reports.................................................... 40
i
<PAGE>
Section 4.04. Compliance Certificate..................................... 41
Section 4.05. Taxes...................................................... 42
Section 4.06. Stay, Extension and Usury Laws............................. 42
Section 4.07. Restricted Payments........................................ 42
Section 4.08. Dividend and Other Payment Restrictions Affecting
Subsidiaries............................................... 45
Section 4.09. Incurrence of Indebtedness and Issuance of
Disqualified Stock......................................... 46
Section 4.10. Asset Sales................................................ 48
Section 4.11. Transactions with Affiliates............................... 50
Section 4.12. Liens...................................................... 50
Section 4.13. Limitations on Sale and Leaseback Transactions............. 51
Section 4.14. Corporate Existence........................................ 51
Section 4.15. Offer to Purchase Upon Change of Control................... 51
Section 4.16. Business Activities........................................ 52
Section 4.17. Insurance.................................................. 56
Section 4.18. Payments for Consent....................................... 56
ARTICLE 5
SUCCESSORS; RELEASE
Section 5.01. Merger, Consolidation or Sale of Assets.................... 57
Section 5.02. Successor Corporation Substituted.......................... 58
Section 5.03 Option to Release MGC...................................... 59
ARTICLE 6
DEFAULTS AND REMEDIES
Section 6.01. Events of Default.......................................... 59
Section 6.02. Acceleration............................................... 60
Section 6.03. Other Remedies............................................. 61
Section 6.04. Waiver of Past Defaults.................................... 61
Section 6.05. Control by Majority........................................ 61
Section 6.06. Limitation on Suits........................................ 61
Section 6.07. Rights of Holders of Notes to Receive Payment.............. 62
Section 6.08. Collection Suit by Trustee................................. 62
Section 6.09. Trustee May File Proofs of Claim........................... 63
Section 6.10. Priorities................................................. 63
Section 6.11. Undertaking for Costs...................................... 64
ARTICLE 7
TRUSTEE
Section 7.01. Duties of Trustee.......................................... 64
Section 7.02. Rights of Trustee.......................................... 65
Section 7.03. Individual Rights of Trustee............................... 66
Section 7.04. Trustee's Disclaimer....................................... 66
Section 7.05. Notice of Defaults......................................... 66
Section 7.06. Reports by Trustee to Holders of the Notes................. 67
Section 7.07. Compensation and Indemnity................................. 67
Section 7.08. Replacement of Trustee..................................... 68
Section 7.09. Successor Trustee by Merger, etc........................... 69
ii
<PAGE>
Section 7.10. Eligibility; Disqualification.............................. 69
Section 7.11. Preferential Collection of Claims Against the Company...... 69
ARTICLE 8
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Section 8.01. Option to Effect Legal Defeasance or Covenant Defeasance... 69
Section 8.02. Legal Defeasance and Discharge............................. 69
Section 8.03. Covenant Defeasance........................................ 70
Section 8.04. Conditions to Legal or Covenant Defeasance................. 70
Section 8.05. Deposited Money and Government Securities to be Held in
Trust; Other Miscellaneous Provisions...................... 72
Section 8.06. Repayment to the Obligors.................................. 72
Section 8.07. Reinstatement.............................................. 72
ARTICLE 9
AMENDMENT, SUPPLEMENT AND WAIVER
Section 9.01. Without Consent of Holders of Notes........................ 73
Section 9.02. With Consent of Holders of Notes........................... 73
Section 9.03. Compliance with Trust Indenture Act........................ 75
Section 9.04. Revocation and Effect of Consents.......................... 75
Section 9.05. Notation on or Exchange of Notes........................... 75
Section 9.06. Trustee to Sign Amendments, etc............................ 75
ARTICLE 10
MISCELLANEOUS
Section 10.01. Trust Indenture Act Controls............................... 77
Section 10.02. Notices.................................................... 77
Section 10.03. Communication by Holders of Notes with Other Holders
of Notes................................................... 78
Section 10.04. Certificate and Opinion as to Conditions Precedent......... 78
Section 10.05. Statements Required in Certificate or Opinion.............. 78
Section 10.06. Rules by Trustee........................................... 79
Section 10.07. No Personal Liability of Directors, Officers, Employees
and Stockholders........................................... 79
Section 10.08. Governing Law.............................................. 79
Section 10.09. No Adverse Interpretation of Other Agreements.............. 79
Section 10.10. Successors................................................. 79
Section 10.11. Severability............................................... 79
Section 10.12. Counterpart Originals...................................... 79
Section 10.13. Table of Contents, Headings, etc........................... 79
EXHIBITS
Exhibit A FORM OF NOTE
Exhibit B FORM OF CERTIFICATE OF TRANSFER
Exhibit C FORM OF CERTIFICATE OF EXCHANGE
iii
<PAGE>
Exhibit D FORM OF CERTIFICATE OF ACQUIRING INSTITUTIONAL
ACCREDITED INVESTOR
iv
<PAGE>
INDENTURE dated as of March 24, 2000 between MGC Communications, Inc.
("MGC"), Mpower Holding Corporation ("Mpower") and HSBC Bank USA, as trustee
(the "Trustee").
MGC, Mpower and the Trustee agree as follows for the benefit of each
other and for the equal and ratable benefit of the holders of the 13% Senior
Notes due 2010 and the Exchange Notes (as defined below) (collectively, the
"Notes"):
ARTICLE 1
DEFINITIONS AND INCORPORATION
BY REFERENCE
SECTION 1.01. DEFINITIONS.
"144A Global Security" means the global security in the form of
Exhibit A hereto bearing the Global Security Legend and the Private Placement
Legend and registered in the name of the Depositary or its nominee that will be
issued in a denomination equal to the outstanding principal amount of the Notes
sold in reliance on Rule 144A.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Restricted Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Restricted Subsidiary of such specified Person, and (ii) Indebtedness secured by
a Lien encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly
or indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise, provided, however,
that beneficial ownership of 25% or more of the voting securities of a Person
shall be deemed to be control.
"Agent" means any Registrar, Paying Agent or co-registrar.
"Applicable Procedures" means, with respect to any transfer or
exchange of or for beneficial interests in any Global Security, the rules and
procedures of the Depositary that apply to such transfer or exchange.
<PAGE>
"Attributable Debt" means, with respect to any Sale and Leaseback
Transaction, the present value at the time of determination (discounted at a
rate consistent with accounting guidelines, as determined in good faith by the
Company) of the payments during the remaining term of the lease (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended) or until the earliest date on which the lessee may
terminate such lease without penalty or upon payment of a penalty (in which case
the rental payments shall include such penalty), after excluding all amounts
required to be paid on account of maintenance and repairs, insurance, taxes,
assessments, water, utilities and similar charges.
"Beneficial Owner" means a beneficial owner as defined in Rules 13d-3
and 13d-5 under the Exchange Act (or any successor rules), including the
provision of such Rules that a Person shall be deemed to have beneficial
ownership of all securities that such Person has a right to acquire within 60
days; provided that a Person will not be deemed a beneficial owner of, or to own
beneficially, any securities if such beneficial ownership (1) arises solely as a
result of a revocable proxy delivered in response to a proxy or consent
solicitation made pursuant to, and in accordance with, the Exchange Act and (2)
is not also then reportable on Schedule 13D or Schedule 13G (or any successor
schedule) under the Exchange Act.
"Board of Directors" means, unless otherwise specified, the Board of
Directors of the Company or the Obligor, as the case may be, or any authorized
committee thereof.
"Business Day" means any day other than a Legal Holiday.
"Capital Lease Obligation" means, at the time any determination
thereof is to be made, the amount of the liability in respect of a capital lease
that would at such time be so required to be capitalized on the balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate
stock, (ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock and (iii) in the case of a partnership,
partnership interests (whether general or limited) and any other interest or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, such partnership.
"Certificated Security" means a certificated Note registered in the
name of the holder thereof and issued in accordance with Section 2.06 hereof,
substantially in the form of Exhibit A hereto, except that such Note shall not
bear the Global Security Legend and shall not have the "Schedule of Exchanges of
Interests in the Global Security" attached thereto.
"Change of Control" means the occurrence of any of the following: (i)
the sale, lease, transfer, conveyance or other disposition, in one or a series
of related transactions, of all or substantially all of the assets of the
Company and its Restricted Subsidiaries, taken as a whole, to any Person or
group (as such term is used in Section 13(d)(3) and 14(d)(2) of the Exchange
Act), (ii) the adoption of a plan relating to the liquidation or dissolution of
the Company, (iii) any Person or group (as defined above) other than the
Permitted Holders is or becomes the Beneficial Owner, directly or indirectly, of
more than 50% of the total Voting Stock or Total Common Equity of the Company,
including by way of merger, consolidation or otherwise or (iv) the first day on
which a majority of the members of the Board of Directors of the Company are not
Continuing Directors.
2
<PAGE>
"Closing Price" on any Trading Day with respect to the per share
price of any shares of Capital Stock means the last reported sale price regular
way or, in case no such reported sale takes place on such day, the average of
the reported closing bid and asked prices regular way, in either case on the New
York Stock Exchange or, if such shares of Capital Stock are not listed or
admitted to trading on such exchange, on the principal national securities
exchange on which such shares are listed or admitted to trading or, if not
listed or admitted to trading on any national securities exchange, on the Nasdaq
National Market or, if such shares are not listed or admitted to trading on any
national securities exchange or quoted on Nasdaq National Market but the issuer
is a Foreign Issuer (as defined in Rule 3b-4(b) under the Exchange Act) and the
principal securities exchange on which such shares are listed or admitted to
trading is a Designated Offshore Securities Market (as defined in Rule 902(a)
under the Securities Act), the average of the reported closing bid and asked
prices regular way on such principal exchange, or, if such shares are not listed
or admitted to trading on any national securities exchange or quoted on Nasdaq
National Market and the issuer and principal securities exchange do not meet
such requirements, the average of the closing bid and asked prices in the
over-the-counter market as furnished by any New York Stock Exchange member firm
that is selected from time to time by the Company for that purpose and is
reasonably acceptable to the Trustee.
"Common Stock" of any Person means Capital Stock of such Person that
does not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Company" means MGC at all times prior to the Release and Mpower at
all times after the Release.
"Consolidated Cash Flow Leverage Ratio" with respect to any Person
means the ratio of the Consolidated Indebtedness of such Person to the
Consolidated EBITDA of such Person, in each case, for the most recently ended
full fiscal quarter for which internal financial statements are available
immediately preceding the transaction requiring this calculation, annualized,
provided, that (1) if the Company or any Restricted Subsidiary of the Company
has incurred any Indebtedness (including Acquired Debt) or if the Company has
issued any Disqualified Stock or if any Restricted Subsidiary of the Company has
issued any Preferred Stock since the beginning of such period that remains
outstanding on the date of such determination or if the transaction giving rise
to the need to calculate the Consolidated Cash Flow Leverage Ratio is an
incurrence of Indebtedness (including Acquired Debt) or the issuance of
Disqualified Stock by the Company, Consolidated EBITDA and Consolidated
Indebtedness for such period will be calculated after giving effect on a pro
forma basis to (A) such Indebtedness, Disqualified Stock or Preferred Stock, as
applicable, as if such Indebtedness had been incurred or such stock had been
issued on the first day of such period, (B) the discharge of any other
Indebtedness repaid, repurchased, defeased or otherwise discharged with the
proceeds of such new Indebtedness or sale of stock as if such discharge had
occurred on the first day of such period, and (C) the interest income realized
by the Company or its Restricted Subsidiaries on the proceeds of such
Indebtedness or of such stock sale, to the extent not yet applied at the date of
determination, assuming such proceeds earned interest at the rate in effect on
the date of determination from the first day of such period through such date of
determination, (2) if since the beginning of such period the Company or any
Restricted Subsidiary of the Company has made any sale of assets (including,
without limitation, any Asset Sales or pursuant to any Sale and Leaseback
Transaction), Consolidated EBITDA for such period will be (A) reduced by an
amount equal to Consolidated EBITDA (if positive) directly attributable to the
assets which are the subject of such sale of assets for such period or (B)
increased by an amount equal to Consolidated EBITDA (if negative) directly
attributable thereto for such period and (3) if since the beginning of such
period the Company or any
3
<PAGE>
Restricted Subsidiary of the Company (by merger or otherwise) has made an
Investment in any Restricted Subsidiary of the Company (or any Person which
becomes a Restricted Subsidiary of the Company) or has made an acquisition of
assets, including, without limitation, any acquisition of assets occurring in
connection with a transaction causing a calculation of Consolidated EBITDA to be
made hereunder, which constitutes all or substantially all of an operating unit
of a business, Consolidated EBITDA for such period will be calculated after
giving pro forma effect thereto (including the incurrence of any Indebtedness
(including Acquired Debt)) as if such Investment or acquisition occurred on the
first day of such period. For purposes of this definition, whenever pro forma
effect is to be given to an acquisition of assets, the pro forma calculations
will be determined in good faith by a responsible financial or accounting
Officer of the Company, provided, however, that such Officer shall assume (i)
the historical sales and gross profit margins associated with such assets for
any consecutive 12- month period ended prior to the date of purchase (provided
that the first month of such 12-month period will be no more than 18 months
prior to such date of purchase) and (ii) other expenses as if such assets had
been owned by the Company since the first day of such period. If any
Indebtedness (including, without limitation, Acquired Debt) bears a floating
rate of interest and is being given pro forma effect, the interest on such
Indebtedness will be calculated as if the rate in effect on the date of
determination had been the applicable rate for the entire period.
"Consolidated EBITDA" as of any date of determination means the
Consolidated Net Income for such period (but without giving effect to
adjustments, accruals, deductions or entries resulting from purchase accounting,
extraordinary losses or gains and any gains or losses from any Asset Sales),
plus the following to the extent deducted in calculating such Consolidated Net
Income: (i) provision for taxes based on income or profits of such Person and
its Subsidiaries, or, in the case of the Company, its Restricted Subsidiaries
for such period, (ii) Consolidated Interest Expense, (iii) depreciation,
amortization (including amortization of goodwill and other intangibles) and
other non-cash charges (excluding any such non-cash charge to the extent that it
represents an accrual of or reserve for cash charges in any future period or
amortization of a prepaid cash expense that was paid in a prior period and
excluding non-cash interest and dividend income) of such Person and its
Subsidiaries, or, in the case of the Company, its Restricted Subsidiaries for
such period, in each case, on a consolidated basis and determined in accordance
with GAAP. Notwithstanding the foregoing, the provision for taxes on the income
or profits of, and the depreciation, amortization, interest expense and other
non-cash charges of, a Subsidiary, or, in the case of the Company, a Restricted
Subsidiary of the referent Person shall be added to Consolidated Net Income to
compute Consolidated EBITDA only to the extent (and in same proportion) that the
Net Income of such Subsidiary, or, in the case of the Company, such Restricted
Subsidiary was included in calculating the Consolidated Net Income of such
Person and only if a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Subsidiary, or, in the
case of the Company, such Restricted Subsidiary or loaned to the Company by any
such Subsidiary, or, in the case of the Company, such Restricted Subsidiary
without prior approval (that has not been obtained), pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to such Subsidiary, or,
in the case of the Company, such Restricted Subsidiary or its stockholders.
"Consolidated Indebtedness" means, with respect to any Person, as of
any date of determination, the aggregate amount of Indebtedness of such Person
and its Subsidiaries, or, in the case of the Company, its Restricted
Subsidiaries as of such date calculated on a consolidated basis in accordance
with GAAP consistently applied.
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"Consolidated Interest Expense" means, for any Person, for any
period, the aggregate of the following for such Person for such period
determined on a consolidated basis in accordance with GAAP: (a) the amount of
interest in respect of Indebtedness (including amortization of original issue
discount, amortization of debt issuance costs, and non-cash interest payments on
any Indebtedness, the interest portion of any deferred payment obligation and
after taking into account the effect of elections made under any Interest Rate
Agreement, however denominated, with respect to such Indebtedness), (b) the
amount of Redeemable Dividends (to the extent not already included in
Indebtedness in determining Consolidated Interest Expense for the relevant
period) and (c) the interest component of rentals in respect of any Capital
Lease Obligation paid, in each case whether accrued or scheduled to be paid or
accrued by such Person during such period to the extent such amounts were
deducted in computing Consolidated Net Income, determined on a consolidated
basis in accordance with GAAP. For purposes of this definition, interest on a
Capital Lease Obligation shall be deemed to accrue at an interest rate
reasonably determined by such Person to be the rate of interest implicit in such
Capital Lease Obligation in accordance with GAAP consistently applied.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Subsidiaries, or,
in the case of the Company, its Restricted Subsidiaries for such period, on a
consolidated basis, determined in accordance with GAAP; provided that:
(i) the Net Income of any Person that is not a Subsidiary, or, in the
case of the Company, a Restricted Subsidiary or that is accounted for by
the equity method of accounting shall be included only to the extent of
the amount of dividends or distributions paid in cash to the referent
Person or a Subsidiary, or, in the case of the Company, a Restricted
Subsidiary thereof,
(ii) the Net Income of any Subsidiary, or, in the case of the
Company, any Restricted Subsidiary shall be excluded to the extent that
the declaration or payment of dividends or other distributions by that
Subsidiary, or Restricted Subsidiary, as the case may be, of that Net
Income is not at the date of determination permitted without any prior
governmental approval (which has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary or Restricted Subsidiary, as the
case may be, or its stockholders,
(iii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded,
(iv) the cumulative effect of a change in accounting principles shall
be excluded, and
(v) the Net Income of any Unrestricted Subsidiary shall be excluded,
whether or not distributed to the Company or one of its Restricted
Subsidiaries.
"Contingent Investment" means, with respect to any Person, any
guarantee by such Person of the performance of another Person or any commitment
by such Person to invest in another Person. Any Investment that consists of a
Contingent Investment shall be deemed made at the time that the guarantee of
performance or the commitment to invest is given, and the amount of such
Investment shall be the maximum monetary obligation under such guarantee of
performance or commitment to invest. To the extent that a Contingent Investment
is released or lapses without payment under the guarantee of
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performance or the commitment to invest, such Investment shall be deemed not
made to the extent of such release or lapse. With respect to any Contingent
Investment, the payment of the guarantee of performance or the payment under the
commitment to invest shall not be deemed to be an additional Investment.
"Continuing Directors" means, as of any date of determination, any
member of the Board of Directors of the Company who (i) was a member of such
Board of Directors on the Issue Date or (ii) was nominated for election or
elected to such Board of Directors with the affirmative vote of a majority of
the Continuing Directors who were members of such Board at the time of such
nomination or election.
"Corporate Trust Office of the Trustee" shall be at the address of
the Trustee specified in Section 10.02 hereof or such other address as to which
the Trustee may give notice to the Company.
"Credit Facility" means any credit facility entered into by and among
the Company or any Restricted Subsidiary and one or more commercial banks or
financial institutions, providing for senior term or revolving credit borrowings
of a type similar to credit facilities typically entered into by commercial
banks and financial institutions, including any related notes, Guarantees,
collateral documents, instruments and agreements executed in connection
therewith, as such credit facility and related agreements may be amended,
extended, refinanced, renewed, restated, replaced or refunded from time to time.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Depositary" means, with respect to the Notes issuable or issued in
whole or in part in global form, the Person specified in Section 2.03 hereof as
the Depositary with respect to the Notes, until a successor shall have been
appointed and become such pursuant to the applicable provision of this
Indenture, and, thereafter, "Depositary" shall mean or include such successor.
"Disqualified Stock" means any Capital Stock to the extent that, and
only to the extent that, by its terms (or by the terms of any security into
which it is convertible or for which it is exchangeable), or upon the happening
of any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder thereof,
in whole or in part, on or prior to the date on which the Notes mature,
provided, however, that any Capital Stock which would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require the Company to repurchase or redeem such Capital Stock upon the
occurrence of a Change of Control occurring prior to the final maturity of the
Notes shall not constitute Disqualified Stock if the change in control
provisions applicable to such Capital Stock are no more favorable to the holders
of such Capital Stock than the provisions applicable to the Notes contained in
Section 4.15 hereof and such Capital Stock specifically provides that the
Company will not repurchase or redeem any such stock pursuant to such provisions
prior to the Company's repurchase of such Notes as are required to be
repurchased pursuant to Section 4.15 hereof.
"Eligible Institution" means a commercial banking institution that
has combined capital and surplus of not less than $500 million or its equivalent
in foreign currency, whose debt is rated "A" (or higher) according to S&P or
Moody's at the time as of which any investment or rollover therein is made.
"Eligible Receivable" means any Receivable not more than 90 days past
due under its scheduled payment terms.
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"Equity Interests" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock or that are measured by the value of
Capital Stock (but excluding any debt security that is convertible into or
exchangeable for Capital Stock).
"Equity Offering" means an underwritten offering of Capital Stock
(other than Disqualified Stock) of the Company registered under the Securities
Act.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
(or any successor act), and the rules and regulations thereunder.
"Exchange Notes" means the 13% Series B Senior Notes due 2010 issued
under this Indenture.
"Exchange Offer" means the exchange offer to be filed with the SEC
pursuant to the Registration Rights Agreement.
"Existing Indebtedness" means all Indebtedness of the Company and its
Restricted Subsidiaries in existence on the Issue Date, including the Notes
issued hereunder on the Issue Date.
"Existing Notes" means MGC's 13% Senior Secured Notes due 2004 and
13% Series B Senior Secured Notes due 2004.
"Fair Market Value" means with respect to any asset or property, the
sale value that would be obtained in an arm's length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy.
"GAAP" means generally accepted accounting principles set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment of
the accounting profession of the United States, which are in effect on the Issue
Date.
"Global Security" means, individually and collectively, each of the
Restricted Global Securities and the Unrestricted Global Security, substantially
in the form of Exhibit A.
"Global Security Legend" means the legend set forth in Section
2.06(g)(ii) to be placed on all Global Securities issued under this Indenture.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"Guarantee" means a guarantee (other than by endorsement of
negotiable instruments for collection in the ordinary course of business),
direct or indirect, in any manner (including, without limitation, letters of
credit and reimbursement agreements in respect thereof), of all or any part of
any Indebtedness.
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"Hedging Obligations" means, with respect to any Person, the
obligations of such Person under Interest Rate Agreements.
"Holder" and "holder" shall mean, when used with reference to a Note,
a Person in whose name a Note is registered.
"IAI Global Security" means the Global Security in the form of
Exhibit A hereto bearing the Global Security Legend and the Private Placement
Legend and deposited with and registered in the name of the Depositary or its
nominee that will be issued in a denomination equal to the outstanding principal
amount of the Notes sold to Institutional Accredited Investors.
"ILEC" means the incumbent local exchange carrier.
"Indebtedness" means, with respect to any Person, an indebtedness of
such Person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or representing the
balance deferred and unpaid of the purchase price of any property (including
pursuant to capital leases) or representing any Hedging Obligations, except any
such balance that constitutes an accrued expense or trade payable, if and to the
extent any of the foregoing (other than Hedging Obligations or letters of
credit) would appear as a liability upon a balance sheet of such Person prepared
in accordance with GAAP, all indebtedness of others secured by a Lien on any
asset of such Person (whether or not such indebtedness is assumed by such
Persons), all obligations to purchase, redeem, retire, defease or otherwise
acquire for value any Disqualified Stock or any warrants, rights or options to
acquire such Disqualified Stock valued, in the case of Disqualified Stock, at
the greatest amount payable in respect thereof on a liquidation (whether
voluntary or involuntary) plus accrued and unpaid dividends, the liquidation
value of any Preferred Stock issued by Subsidiaries of such Person or by
Restricted Subsidiaries of the Company, as the case may be, plus delinquent and
unpaid dividends, and also includes, to the extent not otherwise included, the
Guarantee of items that would be included within this definition and any
amendment, supplement, modification, deferral, renewal, extension or refunding
of any of the above. Notwithstanding the foregoing, in no event will the
following items be deemed to be Indebtedness: (i) performance bonds or similar
security for performance so long as such performance bonds or similar security
for performance would not appear as a liability on a balance sheet of such
Person prepared in accordance with GAAP; (ii) letters of credit secured by cash
collateral in an amount equal to the maximum potential liability of the Company
or a Restricted Subsidiary under such letters of credit; and (iii) letters of
credit which are terminated and, if applicable, repaid in full and not replaced
by another letter of credit, no later than the fifth business day following the
date of issuance, provided, if a letter of credit is not terminated and, if
applicable, repaid in full within five business days of its date of issuance or
is so terminated but is replaced by another letter of credit, on the sixth
business day following the date of issuance of the original letter of credit,
the Company or the Restricted Subsidiary, as the case may be, shall be deemed to
have incurred Indebtedness in an amount equal to the maximum potential liability
of the Company or the Restricted Subsidiary under the letter of credit. In
addition, the amount of any Indebtedness in respect of any Guarantee shall be
the maximum principal amount of the Indebtedness so guaranteed.
"Indenture" means this Indenture, as amended or supplemented from
time to time.
"Independent Appraiser" means a nationally recognized accounting,
appraisal or investment banking firm experienced in the review of similar types
of transactions which does not have, and whose
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directors, officers and employees or Affiliates do not have, a direct or
indirect financial interest in the Affiliate Transaction and which, in the
opinion of the Board of Directors, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"Indirect Participant" means a Person who holds a beneficial interest
in a Global Security through a Participant.
"Initial Purchasers" means Bear, Stearns & Co. Inc., Salomon Smith
Barney Inc., Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Warburg Dillon Read LLC, as initial purchasers in the Offering.
"Interest Rate Agreements" means (i) interest rate swap agreements,
interest rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
"Institutional Accredited Investor" means an institution that is an
"accredited investor" as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act.
"Investments" means, with respect to any Person, all investments by
such Person in other Persons (including Affiliates) in the forms of loans,
Guarantees, Contingent Investments, advances or capital contributions (excluding
commission, travel and similar advances to officers and employees made in the
ordinary course of business), purchases or other acquisitions for consideration
of Indebtedness, Equity Interests or other securities of any other Person and
all other items that are or would be classified as investments on a balance
sheet prepared in accordance with GAAP; provided, however, that any investment
to the extent made with Capital Stock of the Company (other than Disqualified
Stock) shall not be deemed an "Investment" for purposes of this Indenture.
"Issue Date" means March 24, 2000.
"Joint Venture" means a Person in the Telecommunications Business in
which the Company holds less than a majority of the shares of Voting Stock or an
Unrestricted Subsidiary in the Telecommunications Business.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York or at a place of payment are authorized by
law, regulation or executive order to remain closed. If a payment date is a
Legal Holiday at a place of payment, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest shall accrue
with respect to such payment for the intervening period.
"Letter of Transmittal" means the letter of transmittal to be
prepared by the Obligors and sent to all holders of the Notes for use by such
holders in connection with the Exchange Offer.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or
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<PAGE>
agreement to give any financing statement under the Uniform Commercial Code (or
equivalent statutes) of any jurisdiction).
"Liquidated Damages" means all liquidated damages then owing pursuant
to Section 5 of the Registration Rights Agreement.
"Marketable Securities" means:
(i) Government Securities;
(ii) any certificate of deposit maturing not more than 270 days after
the date of acquisition issued by, or time deposit of, an Eligible
Institution;
(iii) commercial paper maturing not more than 270 days after the date
of acquisition issued by a corporation (other than an Affiliate of the
Company) with a rating, at the time as of which any investment therein is
made, of "A-1" (or higher) according to S&P or "P-1" (or higher) according
to Moody's;
(iv) any banker's acceptances or money market deposit accounts issued
or offered by an Eligible Institution; and
(v) any fund investing exclusively in investments of the types
described in clauses (i) through (iv) above.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Income" means, with respect to any Person, the net income (loss)
of such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to Sale and Leaseback Transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiaries, or, in
the case of the Company, any of its Restricted Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries,
or, in the case of the Company, any of its Restricted Subsidiaries and (ii) any
extraordinary gain (but not loss), together with any related provision for taxes
on such extraordinary gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the
Company or any of its Restricted Subsidiaries in respect of any Asset Sale, net
of the direct costs relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of Indebtedness secured by a Lien on the asset or assets that are
the subject of such Asset Sale and any reserve for adjustment in respect of the
sale price of such asset or assets. Net Proceeds shall exclude any non-cash
proceeds received from any Asset Sale, but shall include such proceeds when and
as converted by the Company or any Restricted Subsidiary of the Company to cash.
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"Non-U.S. Person" means a person that is not a U.S. Person as defined
in Rule 902 under the Securities Act.
"Note Custodian" means the Trustee, as custodian with respect to the
Notes in global form, or any successor entity thereto.
"Obligor" or "Obligors" means MGC and Mpower, jointly and severally,
at all times prior to the Release and Mpower at all times after the Release.
"Offering" means the offering of Notes, pursuant to the Offering
Memorandum.
"Offering Memorandum" means the offering memorandum of the Company,
dated March 17, 2000, relating to the Offering.
"Officer" means, with respect to any Person, the Chairman of the
Board, the Chief Executive Officer, the President, the Chief Operating Officer,
the Chief Financial Officer, the Treasurer, any Assistant Treasurer, Controller,
Secretary, Assistant Secretary or any Vice-President of such Person.
"Officers' Certificate" means, with respect to a Person, a
certificate signed by two Officers of such Person, one of whom must be the
principal executive officer, principal financial officer or principal accounting
officer of such Person, delivered to the Trustee.
"Opinion of Counsel" means, with respect to a Person, an opinion from
legal counsel, who may be an employee of or counsel to such Person, any
Subsidiary of such Person or the Trustee, delivered to the Trustee.
"Pari Passu Notes" means any notes issued by the Company which, by
their terms and the terms of any indenture governing such notes, have an
obligation to be repurchased by the Company upon the occurrence of an Asset
Sale.
"Participant" means, with respect to the Depositary, a Person who has
an account with the Depositary.
"Permitted Holder" means (i) Providence Equity Partners Inc., JK&B
Capital, L.P. or any of their respective Affiliates; (ii) any of Maurice J.
Gallagher, Jr., Timothy P. Flynn, Rolla P. Huff or their respective spouses or
lineal descendants and their respective spouses (collectively, the "Individual
Family Holders") whether acting in their own name or as a majority of persons
having the power to exercise the voting rights attached to, or having investment
power over, shares held by others; (iii) any Affiliate of any member of the
Individual Family Holders; (iv) any trust principally for the benefit of one or
more members of the Individual Family Holders (whether or not any member of the
Individual Family Holders is a trustee of the trust); and (v) any charitable
foundation whose majority of members, trustees or directors, as the case may be,
are persons referred to in (ii) above.
"Permitted Investment" means (a) any Investments in the Company or
any Restricted Subsidiary of the Company; (b) any Investments in Marketable
Securities; (c) Investments by the Company or any Restricted Subsidiary of the
Company in a Person, if as a result of such Investment (i) such Person becomes a
Restricted Subsidiary of the Company or (ii) such Person is merged, consolidated
or amalgamated with
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or into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a Restricted Subsidiary of the Company; (d) with
respect to Investments in Joint Ventures at any time outstanding, an amount not
to exceed the greater of (x) $35.0 million or (y) 5% of the amount of the Total
Common Equity of the Company; (e) Investments pursuant to any agreement or
obligation of the Company or a Restricted Subsidiary, in effect on the Issue
Date or on the date a Subsidiary becomes a Restricted Subsidiary (provided that
any such agreement was not entered into in contemplation of such Subsidiary
becoming a Restricted Subsidiary), to make such Investments; (f) Investments in
prepaid expenses, negotiable instruments held for collection and lease, utility
and workers' compensation, performance and other similar deposits; (g) Hedging
Obligations permitted to be incurred pursuant to Section 4.09(b) hereof;
(h) bonds, notes, debentures or other securities received as a result of Asset
Sales permitted under Section 4.10 hereof; (i) Investments received in
satisfaction of judgments or in connection with the settlement of any ordinary
course obligations owed to the Company or any Restricted Subsidiary; (j) loans
and advances to employees and officers of the Company or any of its Restricted
Subsidiaries permitted under Section 4.11 hereof; and (k) Investments in any
Person that is primarily engaged in the Telecommunications Business on the date
of the Investment, in exchange for, or out of the proceeds of an offering (that
occurred within 90 days of the date of any such Investment) of, Capital Stock
(other than Disqualified Stock) of the Company (other than to a Restricted
Subsidiary), to the extent that such proceeds have not been used to make a
Restricted Payment pursuant to Sections 4.07(a)(iv)(3) or 4.07(b)(ii) or used to
incur Indebtedness pursuant to Section 4.09(b)(v).
"Permitted Liens" means (i) Liens securing Indebtedness (including
Capital Lease Obligations) permitted to be incurred pursuant to Sections
4.09(b)(i), 4.09(b)(ii) and 4.09(b)(viii) hereof; (ii) Liens in favor of the
Company; (iii) Liens on property of a Person existing at the time such Person is
merged into or consolidated with the Company or any Restricted Subsidiary of the
Company; provided that such Liens were not incurred in contemplation of such
merger or consolidation and do not extend to any assets other than those of the
Person merged into or consolidated with the Company; (iv) Liens on property
existing at the time of acquisition thereof by the Company or any Restricted
Subsidiary of the Company, provided that such Liens were in existence prior to
the contemplation of such acquisition; (v) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the normal course of business; (vi)
Liens existing on the Issue Date; (vii) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings timely instituted and
diligently concluded, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor;
(viii) Liens incurred in the normal course of business of the Company or any
Restricted Subsidiary of the Company with respect to obligations that do not
exceed $3.0 million at any one time outstanding and that (a) are not incurred in
connection with the borrowing of money or the obtaining of advances or credit
(other than trade credit in the ordinary course of business) and (b) do not in
the aggregate materially detract from the value of the property or materially
impair the use thereof in the operation of business by the Company or such
Restricted Subsidiary; (ix) Liens on Telecommunications Related Assets existing
during the time of the construction thereof; (x) Liens on Receivables to secure
Indebtedness permitted to be incurred pursuant to Section 4.09(b) hereof, but
only to the extent that the outstanding amount of the Indebtedness secured by
such Liens would not represent more than 80% of Eligible Receivables; (xi) Liens
on Telecommunications Equipment required to be incurred under the terms of the
Existing Notes; (xii) Liens on the proceeds of Indebtedness to secure the
payment of principal and interest on the Indebtedness; (xiii) Liens to secure
letters of credit which are deemed not to be Indebtedness in accordance with
clause (ii) of the penultimate sentence of the definition of Indebtedness; and
(xiv) Liens to secure any Permitted Refinancing of any Indebtedness secured by
Liens referred to in the foregoing
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clauses (i), (iii), (iv), (v), (vi), (ix), (xi) or (xiii); but only to the
extent that the Liens do not extend to any other property or assets and the
principal amount of the Indebtedness secured by the Liens is not increased by
more than the fees and expenses incurred in connection with the refinancing.
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock" as applied to the Capital Stock of any Person,
means Capital Stock of such Person of any class or classes (however designated)
that ranks prior, as to payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of such
Person, to shares of Capital Stock of any other class of such Person.
"QIB" means a qualified institutional buyer as defined in Rule 144A
of the Securities Act.
"Receivables" means, with respect to any Person, all of the following
property and interests in property of such Person, whether now existing or
existing in the future or hereafter acquired or arising: (i) accounts; (ii)
accounts receivable, including, without limitation, all rights to payment
created by or arising from sales of goods, leases of goods or the rendition of
services no matter how evidenced, whether or not earned by performance; (iii)
all unpaid seller's or lessor's rights including, without limitation,
rescission, replevin, reclamation and stoppage in transit, relating to any of
the foregoing after creation of the foregoing or arising therefrom; (iv) all
rights to any goods or merchandise represented by any of the foregoing,
including, without limitation, returned or repossessed goods; (v) all reserves
and credit balances with respect to any such accounts receivable or account
debtors; (vi) all letters of credit, security, or Guarantees for any of the
foregoing; (vii) all insurance policies or reports relating to any of the
foregoing; (viii) all collection of deposit accounts relating to any of the
foregoing; (ix) all proceeds of any of the foregoing; and (x) all books and
records relating to any of the foregoing.
"Redeemable Dividend" means, for any dividend with regard to
Disqualified Stock and Preferred Stock, the quotient of the dividend divided by
the difference between one and the maximum statutory federal income tax rate
(expressed as a decimal number between 1 and 0) then applicable to the issuer of
such Disqualified Stock or Preferred Stock.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the date hereof, between the Obligors and the Initial
Purchasers relating to the Notes.
"Regulation S Global Security" means the Global Security in the form
of Exhibit A hereto bearing the Global Security Legend and the Private Placement
Legend and registered in the name of the Depositary or its nominee that will be
issued in a denomination equal to the outstanding principal amount of the Notes
sold to Non-U.S. Persons in an offshore transaction in accordance with Rule 904
under the Securities Act.
"Responsible Officer" when used with respect to the Trustee, means
any officer within the Corporate Trust Department of the Trustee (or any
successor group of the Trustee) with direct responsibility for the
administration of this Indenture and also means, with respect to a particular
corporate trust matter, any other officer to whom such matter is referred
because of his knowledge of and familiarity with the particular subject.
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"Restricted Certificated Security" means a Certificated Security
bearing the Private Placement Legend.
"Restricted Global Security" means any 144A Global Security,
Regulation S Global Security or IAI Global Security that bears the Private
Placement Legend.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Payment Credit" means the sum of (i) any cash received by
the Company as repayment of a Restricted Payment and (ii) the lesser of (x) the
net book value of any Restricted Investment at the time it becomes a Permitted
Investment, (y) the fair market value of such Restricted Investment at the time
it becomes a Permitted Investment and (z) the original fair market value of such
Restricted Investment at the time it was made.
"Restricted Subsidiary" means any subsidiary of the Company that is
not designated by the Board of Directors as an Unrestricted Subsidiary.
"Rule 144" means Rule 144 under the Securities Act.
"Rule 144A" means Rule 144A under the Securities Act.
"Rule 904" means Rule 904 under the Securities Act.
"S&P" means Standard and Poor's Rating Services and its successors.
"SEC" means the Securities and Exchange Commission.
"Sale and Leaseback Transaction" means, with respect to any Person,
any direct or indirect arrangement pursuant to which any property (other than
Capital Stock) is sold by such Person or a Subsidiary, or, in the case of the
Company, a Restricted Subsidiary of such Person and is thereafter leased back
from the purchaser or transferee thereof by such Person or one of its
Subsidiaries, or, in the case of the Company, one of its Restricted
Subsidiaries.
"Securities Act" means the Securities Act of 1933, as amended (or any
successor act), and the rules and regulations thereunder.
"Senior Indebtedness" means any Indebtedness permitted to be incurred
by the Company under the terms of this Indenture, unless the instrument under
which such Indebtedness is incurred expressly provides that it is subordinated
in right of payment to the Notes. Notwithstanding anything to the contrary in
the foregoing, Senior Indebtedness will not include (i) any liability for
federal, state, local or other taxes owed or owing by the Company, (ii) any
Indebtedness of the Company to any of its Subsidiaries or other Affiliates,
(iii) any trade payables or (iv) any Indebtedness that is incurred in violation
of this Indenture.
"Shelf Registration Statement" means the Shelf Registration Statement
as defined in the Registration Rights Agreement.
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"Significant Subsidiary" means (i) any Restricted Subsidiary that
would be a "Significant Subsidiary" as defined in Article 1, Rule 1-02 of
Regulation S-X, promulgated pursuant to the Securities Act, as such Regulation
is in effect on the date hereof, (ii) any Subsidiary which holds any permit or
license which is material to the operations of the Company and its Restricted
Subsidiaries taken as a whole, and (iii) Mpower.
"Subsidiary" of any Person means (i) any corporation, association or
business entity of which more than 50% of the total voting power of shares of
Capital Stock entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by such Person or one or more of
the other Subsidiaries of such Person or a combination thereof and (ii) any
partnership (a) the sole general partner or the managing general partner of
which is such Person or a Subsidiary of such Person or (b) the only general
partners of which are such Person or one or more Subsidiaries of such Person or
any combination thereof.
"Telecommunications Business" means, when used in reference to any
Person, that such Person is engaged primarily in the business of (i)
transmitting, or providing services relating to the transmission of, voice,
video or data through owned or leased transmission facilities, (ii) creating,
developing or marketing communications related network equipment, software and
other devices for use in a Telecommunications Business and (iii) evaluating,
participating or engaging in or pursuing any other activity or opportunity that
is related to those identified in (i) or (ii) above; provided that the
determination of what constitutes a Telecommunications Business shall be made in
good faith by the Board of Directors of the Company.
"Telecommunications Equipment" means telecommunications switches and
related equipment and inventory, including, without limitation, all remote
switching nodes, modems, line cards, transport hardware and equipment or
hardware necessary to install and operate the telecommunications switches.
"Telecommunications Related Assets" means all assets, rights
(contractual or otherwise) and properties, whether tangible or intangible, real
or personal, used or to be used in connection with a Telecommunications
Business.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. ss.ss.
77aaa-77bbbb) as in effect on the date on which this Indenture is qualified
under the TIA, except as provided in Section 9.03 hereof.
"Total Common Equity" of any Person means, as of any date of
determination, the product of (i) the aggregate number of outstanding primary
shares of Common Stock of such Person on such day (which shall not include any
options or warrants on, or securities convertible or exchangeable into, shares
of Common Stock of such Person) and (ii) the average Closing Price of such
Common Stock over the 20 consecutive Trading Days immediately preceding such
day. If no such Closing Price exists with respect to shares of any such class,
the value of such shares for purposes of clause (ii) of the preceding sentence
shall be determined by the Board of Directors of the Company in good faith and
evidenced by a resolution of the Board of Directors filed with the Trustee.
"Total Market Capitalization" of any Person means, as of any day of
determination, the sum of (i) the consolidated Indebtedness of such Person and
its Subsidiaries (except in the case of the Company, in which case of the
Company and its Restricted Subsidiaries) on such day; plus (ii) the product of
(x) the aggregate number of outstanding primary shares of Common Stock of such
Person on such day (which shall
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not include any options or warrants on, or securities convertible or
exchangeable into, shares of Common Stock of such Person); and (y) the average
Closing Price of such Common Stock over the 20 consecutive Trading Days
immediately preceding such day; plus (iii) the liquidation value of any
outstanding shares of Preferred Stock of such Person on such day; less (iv) cash
and cash equivalents (other than restricted cash and restricted cash
equivalents) as presented on such Person's consolidated balance sheet on such
date. If no Closing Price exists with respect to shares of Common Stock, the
value of such shares for purposes of clause (ii) of the preceding sentence shall
be determined by the Company's Board of Directors in good faith and evidenced by
a resolution of the Board of Directors filed with the Trustee.
"Trading Day" with respect to a securities exchange or automated
quotation system, means a day on which such exchange or system is open for a
full day of trading.
"Trustee" means the party named as such above until a successor
replaces it in accordance with the applicable provisions of this Indenture and
thereafter means the successor serving hereunder.
"Unrestricted Certificated Security" means one or more Certificated
Securities that do not and are not required to bear the Private Placement
Legend.
"Unrestricted Global Security" means a permanent global security in
the form of Exhibit A attached hereto that bears the Global Security Legend and
the "Schedule of Exchanges of Interests in the Global Security" attached
thereto, and that is registered in the name of the Depositary, representing
Notes that do not bear the Private Placement Legend.
"Unrestricted Subsidiary" means any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary pursuant to a resolution of
the Board of Directors filed with the Trustee.
"Vendor Indebtedness" means any Indebtedness of the Company or any
Restricted Subsidiary incurred in connection with the acquisition or
construction of Telecommunications Related Assets.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or Persons performing
similar functions) of such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the then
outstanding principal amount of such Indebtedness into (b) the total of the
product obtained by multiplying (x) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (y) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment; provided, that with respect to Capital
Lease Obligations, that maturity shall be calculated after giving effect to all
renewal options by the Lessee.
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SECTION 1.02. OTHER DEFINITIONS.
Defined in
Term Section
"Affiliate Transaction"............................... 4.11
"Asset Sale".......................................... 4.10
"Bankruptcy Law"...................................... 4.01
"Change of Control Offer"............................. 4.15
"Change of Control Payment"........................... 4.15
"Change of Control Payment Date"...................... 4.15
"Commission".......................................... 4.03
"Covenant Defeasance"................................. 8.03
"Custodian"........................................... 6.01
"Event of Default".................................... 6.01
"Excess Proceeds"..................................... 4.10
"Excess Proceeds Offer"............................... 3.09
"incur"............................................... 4.09
"Legal Defeasance" ................................... 8.02
"New Note Exchange" .................................. 5.03
"New Notes" .......................................... 5.03
"Offer Amount"........................................ 3.09
"Offer Period"........................................ 3.09
"Paying Agent"........................................ 2.03
"Payment Default"..................................... 6.01
"Permitted Refinancing"............................... 4.09
"Purchase Date"....................................... 3.09
"Refinance"........................................... 4.09
"Registrar"........................................... 2.03
"Release"............................................. 5.03
"Restricted Payments"................................. 4.07
"Retire".............................................. 4.07
"SEC Reports"......................................... 4.03
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the following
meanings:
"indenture securities" means the Notes;
"indenture security holder" means a holder of a Note;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the Trustee;
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"obligor" on the Notes means the Obligors and any successor obligor
upon the Notes.
All other terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by SEC rule under the TIA
have the meanings so assigned to them.
SECTION 1.04. RULES OF CONSTRUCTION.
Unless the context otherwise requires:
(1) a capitalized term has the meaning assigned to it under this
Article 1;
(2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) "including" means including without limitation; and
(5) words in the singular include the plural, and in the plural
include the singular.
ARTICLE 2
THE NOTES
SECTION 2.01. AMOUNT UNLIMITED; FORM AND DATING.
Subject to the provisions of Section 4.09, the aggregate principal
amount of Notes which may be authenticated and delivered under this Indenture is
unlimited.
The Notes and the Trustee's certificate of authentication shall be
substantially in the form of Exhibit A hereto, the terms of which are
incorporated in and made a part of this Indenture. The Notes may have notations,
legends or endorsements required by law, stock exchange rule or usage. Each Note
shall be dated the date of its authentication. The Notes shall be in
denominations of $1,000 and integral multiples thereof.
The terms and provisions contained in the Notes shall constitute, and
are hereby expressly made, a part of this Indenture and the Obligors and the
Trustee, by their execution and delivery of this Indenture, expressly agree to
such terms and provisions and to be bound thereby. However, to the extent any
provision of any Note conflicts with the express provisions of this Indenture,
the provisions of this Indenture shall govern and be controlling.
Notes issued in global form shall be substantially in the form of
Exhibit A attached hereto (including the Global Security Legend and the
"Schedule of Exchanges in the Global Security" attached thereto). Notes issued
in definitive form shall be substantially in the form of Exhibit A attached
hereto (but without the Global Security Legend and without the "Schedule of
Exchanges of Interests in the Global
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Security" attached thereto). Each Global Security shall represent such of the
outstanding Notes as shall be specified therein and each shall provide that it
shall represent the aggregate principal amount of outstanding Notes from time to
time endorsed thereon and that the aggregate principal amount of outstanding
Notes represented thereby may from time to time be reduced or increased, as
appropriate, to reflect exchanges and redemptions. Any endorsement of a Global
Security to reflect the amount of any increase or decrease in the aggregate
principal amount of outstanding Notes represented thereby shall be made by the
Trustee or the Note Custodian, at the direction of the Trustee, in accordance
with instructions given by the holder thereof as required by Section 2.06
hereof.
SECTION 2.02. EXECUTION AND AUTHENTICATION.
Two Officers of each Obligor shall sign the Notes for the Obligors by
manual or facsimile signature.
If an Officer whose signature is on a Note no longer holds that
office at the time a Note is authenticated, the Note shall nevertheless be
valid. In addition, if a Person is not an Officer at the time a Note is
authenticated, but becomes an Officer on or prior to the delivery of the Note,
the Note shall nevertheless be valid.
A Note shall not be valid until authenticated by the manual signature
of an authorized signatory of the Trustee. The signature of the Trustee shall be
conclusive evidence that the Note has been authenticated under this Indenture.
The Trustee shall, upon a written order of the Obligors signed by two
Officers of each Obligor, authenticate Notes for original issue.
The Trustee may appoint an authenticating agent acceptable to the
Obligors to authenticate Notes. Unless limited by the terms of such appointment,
an authenticating agent may authenticate Notes whenever the Trustee may do so.
Each reference in this Indenture to authentication by the Trustee includes
authentication by such agent. An authenticating agent has the same rights as the
Trustee to deal with the Company or an Affiliate of the Company.
SECTION 2.03. REGISTRAR AND PAYING AGENT.
The Obligors shall maintain an office or agency where Notes may be
presented for registration of transfer or for exchange ("Registrar") and an
office or agency where Notes may be presented for payment ("Paying Agent"). The
Registrar shall keep a register of the Notes and of their transfer and exchange.
The Obligors may appoint one or more co-registrars and one or more additional
paying agents. The term "Registrar" includes any co-registrar and the term
"Paying Agent" includes any additional paying agent. The Obligors may change any
Paying Agent or Registrar without notice to any holder. The Obligors shall
notify the Trustee and the Trustee shall notify the holders of the Notes in
writing of the name and address of any Agent not a party to this Indenture. If
the Obligors fail to appoint or maintain another entity as Registrar or Paying
Agent, the Trustee shall act as such. The Obligors or any of its Subsidiaries
may act as Paying Agent or Registrar. The Obligors shall enter into an
appropriate agency agreement with any Agent not a party to this Indenture, which
shall incorporate the provisions of the TIA. The agreement
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shall implement the provisions of this Indenture that relate to such Agent. The
Obligors shall notify the Trustee of the name and address of any such Agent. If
the Obligors fail to maintain a Registrar or Paying Agent, or fail to give the
foregoing notice, the Trustee shall act as such, and shall be entitled to
appropriate compensation in accordance with Section 7.07 hereof.
The Obligors initially appoint The Depository Trust Company ("DTC")
to act as Depositary with respect to the Global Securities.
The Obligors initially appoint the Trustee to act as the Registrar
and Paying Agent and to act as Note Custodian with respect to the Global
Securities. Except as otherwise specifically provided herein, (i) all references
in this Indenture to the Trustee shall be deemed to refer to the Trustee in its
capacity as Trustee and in its capacities as Registrar and Paying Agent and (ii)
every provision of this Indenture relating to the conduct of or affecting the
liability of or offering protection, immunity or indemnity to the Trustee shall
be deemed to apply with the same force and effect to the Trustee acting in its
capacities as Paying Agent and Registrar.
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST.
The Obligors shall require each Paying Agent other than the Trustee
to agree in writing that the Paying Agent shall hold in trust for the benefit of
holders or the Trustee all money held by the Paying Agent for the payment of
principal, premium or Liquidated Damages, if any, or interest on the Notes, and
will notify the Trustee of any default by the Obligors in making any such
payment. While any such default continues, the Trustee may require a Paying
Agent to pay all money held by it to the Trustee. The Obligors at any time may
require a Paying Agent to pay all money held by it to the Trustee. Upon payment
over to the Trustee, the Paying Agent (if other than the Company or a
Subsidiary) shall have no further liability for the money. If the Company or a
Subsidiary acts as Paying Agent, it shall segregate and hold in a separate trust
fund for the benefit of the holders all money held by it as Paying Agent. Upon
any bankruptcy or reorganization proceedings relating to any Obligor, the
Trustee shall serve as Paying Agent and Registrar for the Notes.
SECTION 2.05. HOLDER LISTS.
If it is the Registrar, the Trustee shall preserve in as current a
form as is reasonably practicable the most recent list available to it of the
names and addresses of all holders and shall otherwise comply with TIA ss.
312(a). If the Trustee is not the Registrar, the Obligors shall furnish to the
Trustee at least five Business Days before each interest payment date and at
such other times as the Trustee may request in writing, a list in such form and
as of such date as the Trustee may reasonably require of the names and addresses
of the holders of the Notes and the Obligors shall otherwise comply with TIA ss.
312(a).
SECTION 2.06. TRANSFER AND EXCHANGE.
(a) Transfer and Exchange of Global Securities. A Global Security may
not be transferred as a whole except by the Depositary to a nominee of the
Depositary, by a nominee of the Depositary to the Depositary or to another
nominee of the Depositary, or by the Depositary or any such nominee to a
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successor Depositary or a nominee of such successor Depositary. All Global
Securities will be exchanged by the Obligors for Certificated Securities if (i)
the Obligors deliver to the Trustee notice from the Depositary that it is
unwilling or unable to continue to act as Depositary or that it is no longer a
clearing agency registered under the Exchange Act and, in either case, a
successor Depositary is not appointed by the Company within 120 days after the
date of such notice from the Depositary or (ii) the Obligors in their sole
discretion determine that the Global Securities (in whole but not in part)
should be exchanged for Certificated Securities and delivers a written notice to
such effect to the Trustee. Upon the occurrence of either of the preceding
events in (i) or (ii) above, Certificated Securities shall be issued in such
names as the Depositary shall instruct the Trustee. Global Securities also may
be exchanged or replaced, in whole or in part, as provided in Section 2.07
hereof. Every Note authenticated and delivered in exchange for, or in lieu of, a
Global Security or any portion thereof, pursuant to Section 2.07 hereof, shall
be authenticated and delivered in the form of, and shall be, a Global Security.
A Global Security may not be exchanged for another Note other than as provided
in this Section 2.06(a), however beneficial interests in a Global Security may
be transferred and exchanged as provided in Section 2.06(b), (c) or (f) hereof.
(b) Transfer and Exchange of Beneficial Interests in the Global
Securities. The transfer and exchange of beneficial interests in the Global
Securities shall be effected through the Depositary, in accordance with the
provisions of this Indenture and the procedures of the Depositary therefor.
Beneficial interests in the Restricted Global Securities shall be subject to
restrictions on transfer comparable to those set forth herein to the extent
required by the Securities Act. The Trustee shall have no obligation to
ascertain the Depositary's compliance with any such restrictions on transfer.
Transfers of beneficial interests in the Global Securities also shall require
compliance with either subparagraph (i) or (ii) below, as applicable, as well as
one or more of the other following subparagraphs as applicable:
(i) Transfer of Beneficial Interests in the Same Global Security.
Beneficial interests in any Restricted Global Security may be transferred
to Persons who take delivery thereof in the form of a beneficial interest
in the same Restricted Global Security in accordance with the transfer
restrictions set forth in the Private Placement Legend. Beneficial
interests in any Unrestricted Global Security may be transferred only to
Persons who take delivery thereof in the form of a beneficial interest in
an Unrestricted Global Security. No written orders or instructions shall
be required to be delivered to the Registrar to effect the transfers
described in this Section 2.06(b)(i).
(ii) All Other Transfers and Exchanges of Beneficial Interests in
Global Securities. In connection with all transfers and exchanges of
beneficial interests (other than transfers of beneficial interests in a
Global Security to Persons who take delivery thereof in the form of a
beneficial interest in the same Global Security), the transferor of such
beneficial interest must deliver to the Registrar either (A) (1) a written
order from a Participant or an Indirect Participant given to the
Depositary in accordance with the Applicable Procedures directing the
Depositary to credit or cause to be credited a beneficial interest in the
specified Global Security in an amount equal to the beneficial interest to
be transferred or exchanged and (2) instructions given in accordance with
the Applicable Procedures containing information regarding the Participant
account to be credited with such increase or (B) (1) a written order from
a Participant or an Indirect Participant given to the Depositary in
accordance with the Applicable Procedures directing the Depositary to
cause to be issued a Certificated Security in an amount equal to the
beneficial interest to be transferred or exchanged and (2) instructions
given by the Depositary to the Registrar containing information regarding
the Person in whose name such Certificated Security shall be registered to
effect the transfer or exchange referred to in (1) above. Upon an Exchange
Offer by the Obligors in accordance with Section 2.06(f) hereof, the
requirements
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of this Section 2.06(b)(ii) shall be deemed to have been satisfied upon
receipt by the Registrar of the instructions contained in the Letter of
Transmittal delivered by the holder of such beneficial interests in the
Restricted Global Securities. Upon satisfaction of all of the requirements
for transfer or exchange of beneficial interests in Global Securities
contained in this Indenture, the Notes and otherwise applicable under the
Securities Act, the Trustee shall adjust the principal amount of the
relevant Global Security pursuant to Section 2.06(h) hereof.
(iii) Transfer of Beneficial Interests to Another Restricted Global
Security. Beneficial interests in any Restricted Global Security may be
transferred to Persons who take delivery thereof in the form of a
beneficial interest in another Restricted Global Security if the Registrar
receives the following:
(A) if the transferee will take delivery in the form of a
beneficial interest in the 144A Global Security, then the transferor
must deliver a certificate in the form of Exhibit B hereto, including
the certifications in item (1) thereof;
(B) if the transferee will take delivery in the form of a
beneficial interest in the Regulation S Global Security or the IAI
Global Security, then the transferor must deliver (x) a certificate
in the form of Exhibit B hereto, including the certifications in item
(2) thereof, (y) an Opinion of Counsel in form reasonably acceptable
to the Obligors and the Registrar to the effect that such transfer is
in compliance with the Securities Act and such beneficial interest is
being transferred in compliance with any applicable blue sky
securities laws of any State of the United States and (z) if the
transfer is being made to an Institutional Accredited Investor and
effected pursuant to an exemption from the registration requirements
of the Securities Act other than Rule 144A under the Securities Act,
Rule 144 under the Securities Act or Rule 904 under the Securities
Act, a certificate from the transferee in the form of Exhibit D
hereto.
(iv) Transfer and Exchange of Beneficial Interests in a Restricted
Global Security for Beneficial Interests in the Unrestricted Global
Security. Beneficial interests in any Restricted Global Security may be
exchanged by any holder thereof for a beneficial interest in the
Unrestricted Global Security or transferred to Persons who take delivery
thereof in the form of a beneficial interest in the Unrestricted Global
Security if:
(A) such exchange or transfer is effected pursuant to the
Exchange Offer in accordance with the Registration Rights Agreement
and the holder, in the case of an exchange, or the transferee, in the
case of a transfer, certifies in the related letter of transmittal
that it is not (1) a broker-dealer, (2) a Person participating in the
distribution of the Exchange Notes or (3) a Person who is an
affiliate (as defined in Rule 144) of any Obligor;
(B) any such transfer is effected pursuant to the Shelf
Registration Statement in accordance with the Registration Rights
Agreement;
(C) any such transfer is effected by a Participating
Broker-Dealer pursuant to the Exchange Offer Registration Statement
in accordance with the Registration Rights Agreement; or
(D) the Registrar receives the following:
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(1) if the holder of such beneficial interest in a
Restricted Global Security proposes to exchange such beneficial
interest for a beneficial interest in the Unrestricted Global
Security, a certificate from such holder in the form of Exhibit C
hereto, including the certifications in item (1)(a) thereof;
(2) if the holder of such beneficial interest in a
Restricted Global Security proposes to transfer such beneficial
interest to a Person who shall take delivery thereof in the form of a
beneficial interest in the Unrestricted Global Security, a
certificate from such holder in the form of Exhibit B hereto,
including the certifications in item (3) thereof;
(3) in each such case set forth in this subparagraph (D),
an Opinion of Counsel in form reasonably acceptable to the Obligors
and the Registrar to the effect that such exchange or transfer
is in compliance with the Securities Act, that the restrictions on
transfer contained herein and in the Private Placement Legend are not
required in order to maintain compliance with the Securities Act, and
such beneficial interest is being exchanged or transferred in
compliance with any applicable blue sky securities laws of any State
of the United States.
If any such transfer is effected pursuant to subparagraph (B) or
(D) above at a time when an Unrestricted Global Security has not yet been
issued, the Obligors shall issue and, upon receipt of an authentication
order in accordance with Section 2.02 hereof, the Trustee shall
authenticate one or more Unrestricted Global Securities in an aggregate
principal amount equal to the principal amount of beneficial interests
transferred pursuant to subparagraph (B) or (D) above.
Beneficial interests in an Unrestricted Global Security cannot
be exchanged for, or transferred to Persons who take delivery thereof in
the form of, a beneficial interest in any Restricted Global Security.
(c) Transfer or Exchange of Beneficial Interests for Certificated
Securities.
(i) If any holder of a beneficial interest in a Restricted Global
Security proposes to exchange such beneficial interest for a Certificated
Security or to transfer such beneficial interest to a Person who takes
delivery thereof in the form of a Certificated Security, then, upon
receipt by the Registrar of the following documentation (all of which may
be submitted by facsimile):
(A) if the holder of such beneficial interest in a Restricted
Global Security proposes to exchange such beneficial interest for a
Restricted Certificated Security, a certificate from such holder in
the form of Exhibit C hereto, including the certifications in item
(2)(a) thereof;
(B) if such beneficial interest is being transferred to a QIB in
accordance with Rule 144A under the Securities Act, a certificate to
the effect set forth in Exhibit B hereto, including the
certifications in item (1) thereof;
(C) if such beneficial interest is being transferred to an
Institutional Accredited Investor in reliance on an exemption from
the registration requirements of the Securities Act other than Rule
144A, a certificate to the effect set forth in Exhibit B hereto,
including the certifications in item (2)(c) thereof, a certificate
from the transferee to the effect set forth in Exhibit D hereof and
an Opinion of Counsel from the transferee or the transferor
reasonably acceptable to the Obligors
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and the Registrar to the effect that such transfer is in compliance
with the Securities Act and such beneficial interest is being
transferred in compliance with any applicable blue sky securities
laws of any State of the United States;
(D) if such beneficial interest is being transferred to the
Company or any of its Subsidiaries, a certificate to the effect set
forth in Exhibit B hereto, including the certifications in item
(2)(a) thereof; or
(E) if such beneficial interest is being transferred pursuant to
an effective registration statement under the Securities Act, a
certificate to the effect set forth in Exhibit B hereto, including
the certifications in item (2)(b) thereof,
the Trustee shall cause the aggregate principal amount of the applicable
Global Security to be reduced accordingly pursuant to Section 2.06(h)
hereof, and the Obligors shall execute and the Trustee shall authenticate
and deliver to the Person designated in the instructions a Certificated
Security in the appropriate principal amount. Certificated Securities
issued in exchange for beneficial interests in a Restricted Global
Security pursuant to this Section 2.06(c) shall be registered in such
names and in such authorized denominations as the holder shall instruct
the Registrar through instructions from the Depositary and the Participant
or Indirect Participant. The Trustee shall deliver such Certificated
Securities to the Persons in whose names such Notes are so registered.
Certificated Securities issued in exchange for a beneficial interest in a
Restricted Global Security pursuant to this Section 2.06(c)(i) shall bear
the Private Placement Legend and shall be subject to all restrictions on
transfer contained therein.
(ii) Notwithstanding 2.06(c)(i), a holder of a beneficial interest in
a Restricted Global Security may exchange such beneficial interest for an
Unrestricted Certificated Security or may transfer such beneficial
interest to a Person who takes delivery thereof in the form of an
Unrestricted Certificated Security only if:
(A) such exchange or transfer is effected pursuant to the
Exchange Offer in accordance with the Registration Rights Agreement
and the holder, in the case of an exchange, or the transferee, in the
case of a transfer, certifies in the related letter of transmittal
that it is not (1) a broker-dealer, (2) a Person participating in the
distribution of the Exchange Notes or (3) a Person who is an
affiliate (as defined in Rule 144) of any Obligors;
(B) any such transfer is effected pursuant to the Shelf
Registration Statement in accordance with the Registration Rights
Agreement;
(C) any such transfer is effected by a Participating
Broker-Dealer pursuant to the Exchange Offer Registration Statement
in accordance with the Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the holder of such beneficial interest in a
Restricted Global Security proposes to exchange such beneficial
interest for a Certificated Security that does not bear the Private
Placement Legend, a certificate from such holder in the form of
Exhibit C hereto, including the certifications in item (1)(b)
thereof;
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(2) if the holder of such beneficial interest in a
Restricted Global Security proposes to transfer such beneficial
interest to a Person who shall take delivery thereof in the form of a
Certificated Security that does not bear the Private Placement
Legend, a certificate from such holder in the form of Exhibit B
hereto, including the certifications in item (3) thereof; and
(3) in each such case set forth in this subparagraph (D),
an Opinion of Counsel in form reasonably acceptable to the Obligors
and the Registrar, to the effect that such exchange or transfer is in
compliance with the Securities Act, that the restrictions on transfer
contained herein and in the Private Placement Legend are not required
in order to maintain compliance with the Securities Act, and such
beneficial interest in a Restricted Global Security is being
exchanged or transferred in compliance with any applicable blue sky
securities laws of any State of the United States.
(iii) If any holder of a beneficial interest in an Unrestricted
Global Security proposes to exchange such beneficial interest for a
Certificated Security or to transfer such beneficial interest to a Person
who takes delivery thereof in the form of a Certificated Security, then,
upon satisfaction of the conditions set forth in Section 2.06(b)(ii), the
Trustee shall cause the aggregate principal amount of the applicable
Global Security to be reduced accordingly pursuant to Section 2.06(h)
hereof, and the Obligors shall execute and the Trustee shall authenticate
and deliver to the Person designated in the instructions a Certificated
Security in the appropriate principal amount. Certificated Securities
issued in exchange for a beneficial interest pursuant to this Section
2.06(c)(iii) shall be registered in such names and in such authorized
denominations as the holder shall instruct the Registrar through
instructions from the Depositary and the Participant or Indirect
Participant. The Trustee shall deliver such Certificated Securities to the
Persons in whose names such Notes are so registered. Certificated
Securities issued in exchange for a beneficial interest pursuant to this
section 2.06(c)(iii) shall not bear the Private Placement Legend.
Beneficial interests in an Unrestricted Global Security cannot be
exchanged for a Certificated Security bearing the Private Placement Legend
or transferred to a Person who takes delivery thereof in the form of a
Certificated Security bearing the Private Placement Legend.
(d) Transfer or Exchange of Certificated Securities for Beneficial
Interests.
(i) If any holder of Restricted Certificated Securities proposes to
exchange such Notes for a beneficial interest in a Restricted Global
Security or to transfer such Certificated Securities to a Person who takes
delivery thereof in the form of a beneficial interest in a Restricted
Global Security, then, upon receipt by the Registrar of the following
documentation (all of which may be submitted by facsimile):
(A) if the holder of such Restricted Certificated Securities
proposes to exchange such Notes for a beneficial interest in a
Restricted Global Security, a certificate from such holder in the
form of Exhibit C hereto, including the certifications in item (2)(b)
thereof;
(B) if such Certificated Securities are being transferred to a
QIB in accordance with Rule 144A under the Securities Act, a
certificate to the effect set forth in Exhibit B hereto, including
the certifications in item (1) thereof;
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(C) if such Certificated Securities are being transferred to a
Non-U.S. Person in an offshore transaction in accordance with Rule
904 under the Securities Act, a certificate to the effect set forth
in Exhibit B hereto, including the certifications in item (2)(c)
thereof;
(D) if such Certificated Securities are being transferred to an
Institutional Accredited Investor in reliance on an exemption from
the registration requirements of the Securities Act other than Rule
144A, a certificate to the effect set forth in Exhibit B hereto,
including the certifications in item (2)(c) thereof, a certificate
from the transferee to the effect set forth in Exhibit D hereof and
an Opinion of Counsel from the transferee or the transferor
reasonably acceptable to the Obligors and the Registrar to the effect
that such transfer is in compliance with the Securities Act and such
Certificated Securities are being transferred in compliance with any
applicable blue sky securities laws of any State of the United
States;
(E) if such Certificated Securities are being transferred to the
Company or any of its Subsidiaries, a certificate to the effect set
forth in Exhibit B hereto, including the certifications in item
(2)(a) thereof; or
(F) if such Certificated Securities are being transferred
pursuant to an effective registration statement under the Securities
Act, a certificate to the effect set forth in Exhibit B hereto,
including the certifications in item (2)(b) thereof,
the Trustee shall cancel the Certificated Securities, increase or cause to
be increased the aggregate principal amount of, in the case of clause (A)
above, the appropriate Restricted Global Security, in the case of clause
(B) above, the 144A Global Security, in the case of clause (C) above, the
Regulation S Global Security, and in all other cases, the IAI Global
Security.
(ii) A holder of Restricted Certificated Securities may exchange such
Notes for a beneficial interest in the Unrestricted Global Security or
transfer such Restricted Certificated Securities to a Person who takes
delivery thereof in the form of a beneficial interest in the Unrestricted
Global Security only if:
(A) such exchange or transfer is effected pursuant to the
Exchange Offer in accordance with the Registration Rights Agreement
and the holder, in the case of an exchange, or the transferee, in the
case of a transfer, certifies in the related letter of transmittal
that it is not (1) a broker-dealer, (2) a Person participating in the
distribution of the Exchange Notes or (3) a Person who is an
affiliate (as defined in Rule 144) of any Obligor;
(B) any such transfer is effected pursuant to the Shelf
Registration Statement in accordance with the Registration Rights
Agreement;
(C) any such transfer is effected by a Participating
Broker-Dealer pursuant to the Exchange Offer Registration Statement
in accordance with the Registration Rights Agreement; or
(D) the Registrar receives the following:
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(1) if the holder of such Certificated Securities proposes
to exchange such Notes for a beneficial interest in the Unrestricted
Global Security, a certificate from such holder in the form of
Exhibit C hereto, including the certifications in item (1)(c)
thereof;
(2) if the holder of such Certificated Securities proposes
to transfer such Notes to a Person who shall take delivery thereof in
the form of a beneficial interest in the Unrestricted Global
Security, a certificate from such holder in the form of Exhibit B
hereto, including the certifications in item (3) thereof; and
(3) in each such case set forth in this subparagraph (D),
an Opinion of Counsel in form reasonably acceptable to the Obligors
and the Registrar to the effect that such exchange or transfer is in
compliance with the Securities Act, that the restrictions on transfer
contained herein and in the Private Placement Legend are not required
in order to maintain compliance with the Securities Act, and such
Certificated Securities are being exchanged or transferred in
compliance with any applicable blue sky securities laws of any State
of the United States.
Upon satisfaction of the conditions of any of the subparagraphs in this
Section 2.06(d)(ii), the Trustee shall cancel the Certificated Securities
and increase or cause to be increased the aggregate principal amount of
the Unrestricted Global Security.
(iii) A holder of Unrestricted Certificated Securities may exchange
such Notes for a beneficial interest in the Unrestricted Global Security
or transfer such Certificated Securities to a Person who takes delivery
thereof in the form of a beneficial interest in the Unrestricted Global
Security. Upon receipt of a request for such an exchange or transfer, the
Trustee shall cancel the Unrestricted Certificated Securities and increase
or cause to be increased the aggregate principal amount of the
Unrestricted Global Security.
If any such exchange or transfer from a Certificated Security to a
beneficial interest is effected pursuant to subparagraphs (ii)(B), (ii)(D) or
(iii) above at a time when an Unrestricted Global Security has not yet been
issued, the Obligors shall issue and, upon receipt of an authentication order in
accordance with Section 2.02 hereof, the Trustee shall authenticate one or more
Unrestricted Global Securities in an aggregate principal amount to the principal
amount of beneficial interests transferred pursuant to subparagraphs (ii)(B),
(ii)(D) or (iii) above.
(e) Transfer and Exchange of Certificated Securities. Upon request by
a holder of Certificated Securities and such holder's compliance with the
provisions of this Section 2.06(e), the Registrar shall register the transfer or
exchange of Certificated Securities. Prior to such registration of transfer or
exchange, the requesting holder shall present or surrender to the Registrar the
Certificated Securities duly endorsed or accompanied by a written instruction of
transfer in form satisfactory to the Registrar duly executed by such holder or
by his attorney, duly authorized in writing. In addition, the requesting holder
shall provide any additional certifications, documents and information, as
applicable, pursuant to the provisions of this Section 2.06(e).
(i) Restricted Certificated Securities may be transferred to and
registered in the name of Persons who take delivery thereof if the
Registrar receives the following:
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(A) if the transfer will be made pursuant to Rule 144A under the
Securities Act, then the transferor must deliver a certificate in the
form of Exhibit B hereto, including the certifications in item (1)
thereof;
(B) if the transfer will be made pursuant to Rule 904, then the
transferor must deliver a certificate in the form of Exhibit B
hereto, including the certifications in item (2)(c) thereof; and
(C) if the transfer will be made pursuant to any other exemption
from the registration requirements of the Securities Act, then the
transferor must deliver (x) a certificate in the form of Exhibit B
hereto, including the certifications in item (3) thereof, (y) an
Opinion of Counsel in form reasonably acceptable to the Obligors and
the Registrar to the effect that such transfer is in compliance with
the Securities Act and such beneficial interest is being transferred
in compliance with any applicable blue sky securities laws of any
State of the United States and (z) if the transfer is being made to
an Institutional Accredited Investor and effected pursuant to an
exemption from the registration requirements of the Securities Act
other than Rule 144A under the Securities Act, Rule 144 under the
Securities Act or Rule 904 under the Securities Act, a certificate
from the transferee in the form of Exhibit D hereto.
(ii) Restricted Certificated Securities may be exchanged by any
holder thereof for an Unrestricted Certificated Security or transferred to
Persons who take delivery thereof in the form of an Unrestricted
Certificated Security if:
(A) such exchange or transfer is effected pursuant to the
Exchange Offer in accordance with the Registration Rights Agreement
and the holder, in the case of an exchange, or the transferee, in the
case of a transfer, certifies in the related letter of transmittal
that it is not (1) a broker-dealer, (2) a Person participating in the
distribution of the Exchange Notes or (3) a Person who is an
affiliate (as defined in Rule 144) of any Obligor;
(B) any such transfer is effected pursuant to the Shelf
Registration Statement in accordance with the Registration Rights
Agreement;
(C) any such transfer is effected by a Participating
Broker-Dealer pursuant to the Exchange Offer Registration Statement
in accordance with the Registration Rights Agreement; or
(D) the Registrar receives the following:
(1) if the holder of such Restricted Certificated
Securities proposes to exchange such Notes for an Unrestricted
Certificated Security, a certificate from such holder in the form of
Exhibit C hereto, including the certifications in item (1)(c)
thereof;
(2) if the holder of such Restricted Certificated
Securities proposes to transfer such Notes to a Person who shall take
delivery thereof in the form of an Unrestricted Certificated
Security, a certificate from such holder in the form of Exhibit B
hereto, including the certifications in item (3) thereof; and
(3) in each such case set forth in this subparagraph (D),
an Opinion of Counsel in form reasonably acceptable to the Obligors
and the Registrar to the effect that such exchange or
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transfer is in compliance with the Securities Act, that the
restrictions on transfer contained herein and in the Private
Placement Legend are not required in order to maintain compliance
with the Securities Act, and such Restricted Certificated Security is
being exchanged or transferred in compliance with any applicable blue
sky securities laws of any State of the United States.
(iii) A holder of Unrestricted Certificated Securities may transfer
such Notes to a Person who takes delivery thereof in the form of an
Unrestricted Certificated Security. Upon receipt of a request to register
such a transfer, the Registrar shall register the Unrestricted
Certificated Securities pursuant to the instructions from the holder
thereof. Unrestricted Certificated Securities cannot be exchanged for or
transferred to Persons who take delivery thereof in the form of a
Restricted Certificated Security.
(f) Exchange Offer. Upon the occurrence of the Exchange Offer in
accordance with the Registration Rights Agreement, the Obligors shall issue and,
upon receipt of an authentication order in accordance with Section 2.02, the
Trustee shall authenticate (i) one or more Unrestricted Global Securities in an
aggregate principal amount equal to the principal amount of the beneficial
interests in the Restricted Global Securities tendered for acceptance by Persons
that have certified in the related letter of transmittal that they are not (x)
broker-dealers, (y) Persons participating in the distribution of the Exchange
Notes or (z) Persons who are affiliates (as defined in Rule 144) of any Obligor
and accepted for exchange in the Exchange Offer and (ii) Certificated Securities
in an aggregate principal amount equal to the principal amount of the Restricted
Certificated Securities accepted for exchange in the Exchange Offer. Concurrent
with the issuance of such Notes, the Trustee shall cause the aggregate principal
amount of the applicable Restricted Global Securities to be reduced accordingly,
and the Obligors shall execute and the Trustee shall authenticate and deliver to
the Persons designated by the holders of Certificated Securities so accepted
Restricted Certificated Securities in the appropriate principal amount.
(g) Legends. The following legends shall appear on the face of all
Global Securities and Certificated Securities issued under this Indenture unless
specifically stated otherwise in the applicable provisions of this Indenture.
(i) Private Placement Legend.
(A) Except as permitted by subparagraph (b) below, each Global
Security and each Certificated Security (and all Notes issued in
exchange therefor or substitution thereof) shall bear the legend in
substantially the following form:
"THE SECURITY (OR ITS PREDECESSORS) EVIDENCED HEREBY HAS NOT
BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933
(THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY OR ANY
INTEREST OR PARTICIPATION HEREIN MAY NOT BE OFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED
OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH
TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE
HOLDER OF THE SECURITY BY ITS ACCEPTANCE HEREOF AGREES (A) TO
OFFER, SELL, PLEDGE OR OTHERWISE TRANSFER THIS SECURITY ONLY (1)
TO THE COMPANY, (2) PURSUANT TO A REGISTRATION STATEMENT WHICH
HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (3) TO A
PERSON
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IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL
BUYER" AS DEFINED IN RULE 144A IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144A, (4) PURSUANT TO OFFERS AND SALES TO
NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 904 UNDER THE
SECURITIES ACT, (5) TO AN INSTITUTIONAL "ACCREDITED INVESTOR"
(AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE
SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF
RULE 144 UNDER THE SECURITIES ACT OR (6) PURSUANT TO ANY OTHER
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE
SECURITIES ACT (AND IN THE CASE OF A TRANSFER PURSUANT TO CLAUSE
(5) OR (6), BASED ON AN OPINION OF COUNSEL IF THE COMPANY SO
REQUESTS), SUBJECT IN EACH OF THE FOREGOING CASES TO APPLICABLE
SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER
APPLICABLE JURISDICTION AND (B) THAT IT WILL, AND EACH
SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT
OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET
FORTH IN (A) ABOVE."
(B) Notwithstanding the foregoing, any Global Security or
Certificated Security issued pursuant to subparagraphs (b)(iv),
(c)(ii), (c)(iii), (d)(ii), (d)(iii), (e)(ii), (e)(iii) or (f) to
this Section 2.06 (and all Notes issued in exchange therefor or
substitution thereof) shall not bear the Private Placement Legend.
(ii) Global Security Legend. Each Global Security shall bear a legend
in substantially the following form:
"THIS GLOBAL SECURITY IS HELD BY THE DEPOSITARY (AS DEFINED IN THE
INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE
BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO
ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY
MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION
2.07 OF THE INDENTURE, (II) THIS GLOBAL SECURITY MAY BE EXCHANGED IN
WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE,
(III) THIS GLOBAL SECURITY MAY BE DELIVERED TO THE TRUSTEE FOR
CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS
GLOBAL SECURITY MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE
PRIOR WRITTEN CONSENT OF THE COMPANY."
(h) Cancellation and/or Adjustment of Global Securities. At such time
as all beneficial interests in a particular Global Security have been exchanged
for Certificated Securities or a particular Global Security has been redeemed,
repurchased or canceled in whole and not in part, each such Global Security
shall be returned to or retained and canceled by the Trustee in accordance with
Section 2.11 hereof. At any time prior to such cancellation, if any beneficial
interest in a Global Security is exchanged for or transferred to a Person who
will take delivery thereof in the form of a beneficial interest in another
Global Security or Certificated Securities, the principal amount of Notes
represented by such Global Security shall be reduced accordingly and an
endorsement shall be made on such Global Security, by the Trustee or by
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the Depositary at the direction of the Trustee, to reflect such reduction; and
if the beneficial interest is being exchanged for or transferred to a Person who
will take delivery thereof in the form of a beneficial interest in another
Global Security, such other Global Security shall be increased accordingly and
an endorsement shall be made on such Global Security, by the Trustee or by the
Depositary at the direction of the Trustee, to reflect such increase.
(i) General Provisions Relating to Transfers and Exchanges.
(i) To permit registrations of transfers and exchanges, the Obligors
shall execute and the Trustee shall authenticate Global Securities and
Certificated Securities upon the Obligors' order or at the Registrar's
request.
(ii) No service charge shall be made to a holder of a beneficial
interest in a Global Security or to a holder of a Certificated Security
for any registration of transfer or exchange, but the Obligors may require
payment of a sum sufficient to cover any transfer tax or similar
governmental charge payable in connection therewith (other than any such
transfer taxes or similar governmental charge payable upon exchange or
transfer pursuant to Sections 2.10, 3.06, 4.10, 4.15 and 9.05 hereof).
(iii) The Registrar shall not be required to register the transfer of
or exchange any Note selected for redemption in whole or in part, except
the unredeemed portion of any Note being redeemed in part.
(iv) All Global Securities and Certificated Securities issued upon
any registration of transfer or exchange of Global Securities or
Certificated Securities shall be the valid obligations of the Obligors,
evidencing the same debt, and entitled to the same benefits under this
Indenture, as the Global Securities or Certificated Securities surrendered
upon such registration of transfer or exchange.
(v) The Obligors shall not be required (A) to issue, to register the
transfer of or to exchange Notes during a period beginning at the opening
of business 15 days before the day of any selection of Notes for
redemption under Section 3.02 hereof and ending at the close of business
on the day of selection, (B) to register the transfer of or to exchange
any Note so selected for redemption in whole or in part, except the
unredeemed portion of any Note being redeemed in part or (C) to register
the transfer of or to exchange a Note between a record date and the next
succeeding Interest Payment Date.
(vi) Prior to due presentment for the registration of a transfer of
any Note, the Trustee, any Agent and the Obligors may deem and treat the
Person in whose name any Note is registered as the absolute owner of such
Note for the purpose of receiving payment of principal of and interest on
such Notes and for all other purposes, and none of the Trustee, any Agent
or the Obligors shall be affected by notice to the contrary.
(vii) The Trustee shall authenticate Global Securities and
Certificated Securities in accordance with the provisions of Section 2.02
hereof.
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SECTION 2.07. REPLACEMENT NOTES.
If any mutilated Note is surrendered to the Trustee, or the Obligors
and the Trustee receives evidence to their satisfaction of the destruction, loss
or theft of any Note, the Obligors shall issue and the Trustee, upon the written
order of the Obligors signed by two Officers of each Obligor, shall authenticate
a replacement Note if the Trustee's requirements are met. If required by the
Trustee or the Obligors, an indemnity bond must be supplied by the holder that
is sufficient in the judgment of the Trustee and the Obligors to protect the
Obligors, the Trustee, any Agent and any authenticating agent from any loss that
any of them may suffer if a Note is replaced. The Obligors may charge for their
expenses in replacing a Note.
Every replacement Note is an additional obligation of the Obligors
and shall be entitled to all of the benefits of this Indenture equally and
proportionately with all other Notes duly issued hereunder.
SECTION 2.08. OUTSTANDING NOTES.
The Notes outstanding at any time are all the Notes authenticated by
the Trustee except for those canceled by it, those delivered to it for
cancellation and those described in this Section 2.08 as not outstanding. Except
as set forth in Section 2.09 hereof, a Note does not cease to be outstanding
because an Obligor or an Affiliate of an Obligor holds the Note.
If a Note is replaced pursuant to Section 2.07 hereof, it ceases to
be outstanding unless the Trustee receives proof satisfactory to it that the
replaced Note is held by a protected purchaser.
If the principal amount of any Note is considered paid under Section
8.02 hereof, it ceases to be outstanding and interest on it ceases to accrue.
If the Paying Agent (other than an Obligor, a Subsidiary or an
Affiliate of any thereof) segregates and holds in trust, in accordance with this
Indenture, on a redemption date or maturity date, money sufficient to pay all
principal and interest, if any, payable on that date with respect to the Notes
(or the portion thereof to be redeemed or maturing, as the case may be), then on
and after that date such Notes (or portions thereof) shall be deemed to be no
longer outstanding and shall cease to accrue interest.
SECTION 2.09. TREASURY NOTES.
In determining whether the holders of the required principal amount
of Notes have concurred in any direction, waiver or consent, Notes owned by any
Obligor, or an Affiliate of any Obligor, shall be considered as though not
outstanding, except that for the purposes of determining whether the Trustee
shall be protected in relying on any such direction, waiver or consent, only
Notes that a Responsible Officer of the Trustee knows are so owned shall be so
disregarded.
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SECTION 2.10. TEMPORARY NOTES.
Until definitive Notes are ready for delivery, the Obligors may
prepare and the Trustee shall authenticate temporary Notes upon a written order
of the Obligors signed by two Officers of each Obligor. Temporary Notes shall be
substantially in the form of definitive Notes but may have variations that the
Obligors considers appropriate for temporary Notes and as shall be reasonably
acceptable to the Trustee. Without unreasonable delay, the Obligors shall
prepare and the Trustee shall authenticate definitive Notes and deliver them in
exchange for temporary Notes.
Holders of temporary Notes shall be entitled to all of the benefits
of this Indenture.
SECTION 2.11. CANCELLATION.
The Obligors at any time may deliver Notes to the Trustee for
cancellation. The Registrar and Paying Agent shall forward to the Trustee any
Notes surrendered to them for registration of transfer, exchange or payment. The
Trustee and no one else shall cancel all Notes surrendered for registration of
transfer, exchange, payment, replacement or cancellation and shall destroy
canceled Notes (subject to the record retention requirement of the Exchange
Act), unless the Company directs canceled Notes to be returned to it.
Certification of the destruction of all canceled Notes shall be delivered to the
Company for all certificates so destroyed. The Obligors may not issue new Notes
to replace Notes that they have redeemed, paid or delivered to the Trustee for
cancellation.
SECTION 2.12. DEFAULTED INTEREST.
If the Obligors default in a payment of interest on the Notes, they
shall pay the defaulted interest in any lawful manner plus, to the extent
lawful, interest payable on the defaulted interest, to the Persons who are
holders on a subsequent special record date, which date shall be at the earliest
practicable date but in all events at least five Business Days prior to the
payment date, in each case at the rate provided in the Notes. The Company shall
fix or cause to be fixed each such special record date and payment date,
provided that the Company shall fix or cause to be fixed each such special
record date as early as practicable prior to the payment date, and the Company
shall mail or cause to be mailed as early as practicable to each holder a notice
that states the special record date, the related payment date and the amount of
defaulted interest to be paid.
SECTION 2.13. RECORD DATE.
The record date for purposes of determining the identity of holders
of the Notes entitled to vote or consent to any action by vote or consent
authorized or permitted under this Indenture shall be determined as provided for
in TIA ss. 316(c).
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SECTION 2.14. CUSIP NUMBER.
The Obligors in issuing the Notes may use a "CUSIP" number and, if
they do so, the Trustee shall use the CUSIP number in notices of redemption or
exchange as a convenience to holders; provided that any such notice may state
that no representation is made as to the correctness or accuracy of the CUSIP
number printed in the notice or on the Notes and that reliance may be placed
only on the other identification numbers printed on the Notes. The Obligors will
promptly notify the Trustee of any change in the CUSIP number.
ARTICLE 3
REDEMPTION AND CERTAIN REPURCHASES
SECTION 3.01. NOTICES TO TRUSTEE.
If the Company elects to redeem Notes pursuant to the optional
redemption provisions of Section 3.07 hereof, it shall furnish to the Trustee,
at least 45 days (unless a shorter period is acceptable to the Trustee) but not
more than 60 days before a redemption date, an Officers' Certificate setting
forth (i) the clause of this Indenture pursuant to which the redemption shall
occur, (ii) the redemption date, (iii) the principal amount of Notes to be
redeemed and (iv) the redemption price.
SECTION 3.02. SELECTION OF NOTES TO BE REDEEMED.
If less than all of the Notes are to be redeemed at any time, except
as provided in Section 3.09, the Trustee shall select the Notes to be redeemed
or purchased in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed, or, if the Notes are
not so listed, on a pro rata basis, by lot or in accordance with any other
method the Trustee considers fair and appropriate (and in such manner as
complies with applicable legal and stock exchange requirements, if any),
provided that no Notes with a principal amount of $1,000 or less shall be
redeemed or purchased in part. A new Note in principal amount equal to the
unredeemed or unpurchased portion shall be issued in the name of the holder
thereof upon cancellation of the original Note. On and after the redemption or
purchase date, interest shall cease to accrue on the Notes or portions of them
called for redemption or purchase. In the event of partial redemption by lot,
the particular Notes to be redeemed shall be selected, unless otherwise provided
herein, not less than 30 nor more than 60 days prior to the redemption date by
the Trustee from the outstanding Notes not previously called for redemption.
The Trustee shall promptly notify the Company in writing of the Notes
selected for redemption and, in the case of any Note selected for partial
redemption, the principal amount thereof to be redeemed. Notes and portions of
them selected shall be in amounts of $1,000 or whole multiples of $1,000; except
that if all of the Notes of a holder are to be redeemed, the entire outstanding
amount of Notes held by such holder, even if not a multiple of $1,000, shall be
redeemed. Except as provided in the preceding sentence, provisions of this
Indenture that apply to Notes called for redemption also apply to portions of
Notes called for redemption.
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SECTION 3.03. NOTICE OF REDEMPTION.
Subject to the provisions of Section 3.09 hereof, at least 30 days
but not more than 60 days before a redemption date, the Company shall mail or
cause to be mailed, by first class mail, a notice of redemption to each holder
whose Notes are to be redeemed at its registered address (provided that in the
event of a redemption pursuant to Section 3.07(b) hereof arising out of a sale
of the Company's Capital Stock (other than Disqualified Stock) in an Equity
Offering, such notice shall not be mailed prior to the consummation of such
sale).
The notice shall identify the Notes to be redeemed and shall state:
(a) the redemption date;
(b) the redemption price;
(c) if any Note is being redeemed in part, the portion of the
principal amount of such Note to be redeemed and that, after the
redemption date upon surrender of such Note, a new Note or Notes in
principal amount equal to the unredeemed portion shall be issued;
(d) the name and address of the Paying Agent;
(e) that Notes called for redemption must be surrendered to the
Paying Agent to collect the redemption price;
(f) that, unless the Company defaults in making such redemption
payment, interest on Notes (or portions thereof) called for redemption
ceases to accrue on and after the redemption date;
(g) the paragraph of the Notes and/or section of this Indenture
pursuant to which the Notes called for redemption are being redeemed; and
(h) that no representation is made as to the correctness or accuracy
of the CUSIP number, if any, listed in such notice or printed on the
Notes.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at its expense; provided, however, that the
Company shall have delivered to the Trustee, at least 45 days (unless a shorter
period is acceptable to the Trustee) prior to the redemption date, an Officers'
Certificate requesting that the Trustee give such notice and setting forth the
information to be stated in such notice as provided in the preceding paragraph.
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION.
Once notice of redemption is mailed in accordance with Section 3.03
hereof, Notes called for redemption become due and payable on the redemption
date at the redemption price stated in such notice. A notice of redemption may
not be conditional.
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SECTION 3.05. DEPOSIT OF REDEMPTION PRICE.
On or prior to the redemption date, the Company shall deposit with
the Trustee or with the Paying Agent (or, if the Company or a Subsidiary is the
Paying Agent, shall segregate and hold in trust) immediately available funds
sufficient to pay the redemption price of and accrued interest, if any, on all
Notes to be redeemed on that date. The Trustee or the Paying Agent shall
promptly return to the Company any funds deposited with the Trustee or the
Paying Agent by the Company in excess of the amounts necessary to pay the
redemption price of, and accrued interest, if any, on, all Notes to be redeemed.
If the Company complies with the provisions of the preceding
paragraph, on and after the redemption date, interest shall cease to accrue on
the Notes or the portions of Notes called for redemption. If a Note is redeemed
on or after an interest record date but on or prior to the related interest
payment date, then any accrued and unpaid interest shall be paid to the Person
in whose name such Note was registered at the close of business on such record
date. If any Note called for redemption shall not be so paid upon surrender for
redemption because of the failure of the Company to comply with the preceding
paragraph, interest shall be paid on the unpaid redemption price, from the
redemption date until such redemption price is paid, and to the extent lawful on
any interest not paid on such unpaid principal, in each case at the rate
provided in the Notes.
SECTION 3.06. NOTES REDEEMED IN PART.
Upon surrender of a Note that is redeemed in part, the Company shall
issue and the Trustee shall authenticate for the holder of the Notes at the
expense of the Company a new Note equal in principal amount to the unredeemed
portion of the Note surrendered.
SECTION 3.07. OPTIONAL REDEMPTION.
(a) Except as set forth in Section 3.07(b) below, the Notes will not
be redeemable at the Company's option prior to April 1, 2005. Thereafter, the
Notes will be subject to redemption at the option of the Company, in whole or in
part, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the applicable redemption date, if redeemed during the twelve-month
period beginning on April 1 of the years indicated below:
Year Percentage
---- ----------
2005................................................. 106.500%
2006................................................. 104.330%
2007................................................. 102.166%
2008 and thereafter.................................. 100.000%
(b) Notwithstanding the foregoing, in the event of the sale by the
Company prior to April 1, 2003 of its Capital Stock (other than Disqualified
Stock) in one or more Equity Offerings, up to a maximum of 35% of the aggregate
principal amount of the Notes originally issued, including any Notes issued
after the Issue Date hereunder, will, at the option of the Company, be
redeemable from the net cash
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proceeds of one or more Equity Offerings (but only to the extent the proceeds of
such Equity Offering consist of cash or readily marketable cash equivalents) at
a redemption price equal to 113% of the principal amount of the Notes plus
accrued and unpaid interest and Liquidated Damages, if any, on the Notes
redeemed to the redemption date, provided that at least 65% of the aggregate
principal amount of the Notes originally issued, including any Notes issued
after the Issue Date hereunder, remain outstanding immediately after the
occurrence of such redemption and that such redemption occurs within 90 days of
the date of the closing of such Equity Offering.
(c) Any redemption pursuant to this Section 3.07 shall be made pursuant
to the provisions of Sections 3.01 through 3.06 hereof.
SECTION 3.08. MANDATORY REDEMPTION.
Except as set forth under Sections 3.09 and 4.15 hereof, the Company
shall not be required to make mandatory redemption or sinking fund payments with
respect to the Notes.
SECTION 3.09. OFFER TO PURCHASE WITH EXCESS ASSET SALE PROCEEDS.
If at any time the cumulative amount of Excess Proceeds that have not
been applied in accordance with Section 4.10(b) exceeds $10.0 million, the
Company shall, within 30 days thereafter, make an offer to all holders of Notes
and Pari Passu Notes (an "Excess Proceeds Offer"), to purchase the maximum
principal amount of Notes and Pari Passu Notes that may be purchased out of such
Excess Proceeds, at an offer price in cash in an amount equal to 100% of the
outstanding principal amount of the Notes to the date fixed for the closing of
such offer and 100% of the accreted value or 100% of the outstanding principal
amount, as applicable, of the Pari Passu Notes, plus accrued and unpaid interest
and Liquidated Damages thereon, if any, to the date fixed for the closing of
such offer, in accordance with the procedures specified below. The Company may
also voluntarily use the Net Proceeds of any Asset Sale to make at any time an
Excess Proceeds Offer.
The Excess Proceeds Offer shall remain open for a period of 20
Business Days following its commencement and no longer, except to the extent
that a longer period is required by applicable law (the "Offer Period"). No
later than five Business Days after the termination of the Offer Period (the
"Purchase Date"), the Company shall purchase the maximum principal amount of
Notes and the maximum accreted value or principal amount, as the case may be, of
Pari Passu Notes that may be purchased with such Excess Proceeds (or such pro
rata portion based upon the principal amount of Notes and the accreted value
and/or the principal amount, as the case may be, of Pari Passu Notes tendered if
the principal amount of Notes and the accreted value and/or the principal
amount, as the case may be, of Pari Passu Notes tendered is in excess of the
Excess Proceeds) (which maximum principal amount of Notes shall be the "Offer
Amount") or, if less than the Offer Amount has been tendered, all Notes and Pari
Passu Notes tendered in response to the Excess Proceeds Offer, subject to the
provisions of Section 4.10 hereof.
If the Purchase Date is on or after an interest record date and on or
before the related interest payment date, any accrued interest on the Notes
shall be paid to the Person in whose name a Note is registered at the close of
business on such record date, and no additional interest shall be payable to
holders
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who tender Notes pursuant to the Excess Proceeds Offer on the portion of
the tendered Notes purchased pursuant to the Excess Proceeds Offer.
Upon the commencement of any Excess Proceeds Offer, the Company shall
send, by first class mail, a notice to the Trustee and each of the holders of
the Notes, with a copy to the Trustee. The notice shall contain all instructions
and materials necessary to enable such holders to tender Notes pursuant to the
Excess Proceeds Offer. The Excess Proceeds Offer shall be made to all holders.
The notice, which shall govern the terms of the Excess Proceeds Offer, shall
state:
(a) that the Excess Proceeds Offer is being made pursuant to
Sections 3.09 and 4.10 hereof and the length of time the Excess Proceeds
Offer shall remain open;
(b) the Offer Amount, the purchase price and the Purchase Date;
(c) that any Note or portion thereof not tendered or accepted
for payment shall continue to accrue interest;
(d) that any Note or portion thereof accepted for payment
pursuant to the Excess Proceeds Offer shall cease to accrue interest after
the Purchase Date;
(e) that holders electing to have a Note or portion thereof
purchased pursuant to any Excess Proceeds Offer shall be required to
surrender the Note, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of the Note completed, to the Company, a
depositary, if appointed by the Company, or a Paying Agent at the address
specified in the notice at least three Business Days before the Purchase
Date;
(f) that holders shall be entitled to withdraw their election if
the Company, depositary or Paying Agent, as the case may be, receives, not
later than the expiration of the Offer Period, a telegram, telex,
facsimile transmission or letter setting forth the name of the holder, the
principal amount of the Note or portion thereof the holder delivered for
purchase and a statement that such holder is withdrawing his election to
have the Note or portion thereof purchased;
(g) that, if the aggregate principal amount of Notes and the
accreted value or the aggregate principal amount, as the case may be, of
Pari Passu Notes tendered by holders of such notes exceeds the Offer
Amount, the Trustee shall select the Notes to be purchased on a pro rata
basis as described above (with such adjustments as may be deemed
appropriate by the Trustee so that only Notes in denominations of $1,000,
or integral multiples thereof, shall be purchased); and
(h) that holders whose Notes were purchased only in part shall
be issued new Notes equal in principal amount to the unpurchased portion
of the Notes surrendered (or transferred by book-entry transfer).
On or before the Purchase Date, the Company shall, to the extent
lawful, accept for payment, on a pro rata basis (as described above) to the
extent necessary, the Offer Amount of Notes or Pari Passu Notes or portions
thereof tendered pursuant to the Excess Proceeds Offer, or if less than the
Offer Amount has been tendered, all Notes or Pari Passu Notes or portions
thereof tendered, and deliver to the Trustee an Officers' Certificate stating
that such Notes or Pari Passu Notes or portions thereof were accepted for
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payment by the Company in accordance with the terms of this Section 3.09. The
Company or Paying Agent, as the case may be, shall promptly (but in any case not
later than five days after the Purchase Date) mail or deliver to each tendering
holder an amount equal to the purchase price of the Note or portion thereof
tendered by such holder and accepted by the Company for purchase, and the
Company shall promptly issue a new Note, and the Trustee shall authenticate and
mail or deliver such new Note to such holder equal in principal amount to any
unpurchased portion of the Note surrendered. Any Note not so accepted shall be
promptly mailed or delivered by the Company to the holder thereof. The Company
shall publicly announce the results of the Excess Proceeds Offer on the Purchase
Date. In the event that the aggregate amount of Excess Proceeds exceeds the
aggregate principal amount of Notes, or the aggregate accreted value or the
aggregate principal amount, as the case may be, of Pari Passu Notes or portion
thereof surrendered by holders of such notes pursuant to an Excess Proceeds
Offer, the Company may use the remaining Excess Proceeds for general purposes.
Upon completion of an Excess Proceeds Offer, the amount of Excess Proceeds shall
be deemed to be reset at zero.
Other than as specifically provided in this Section 3.09, any
purchase pursuant to this Section 3.09 shall be made pursuant to the provisions
of Sections 3.01 through 3.06 hereof. No repurchase of Notes under this Section
3.9 shall be deemed to be a redemption of Notes.
ARTICLE 4
COVENANTS
SECTION 4.01. PAYMENT OF NOTES.
The Obligors shall pay or cause to be paid the principal of, premium,
if any, and interest, on the Notes on the dates and in the manner provided in
the Notes and this Indenture. Principal, premium, if any, and interest shall be
considered paid on the date due if the Paying Agent, if other than an Obligor,
holds as of the due date money deposited by, or on behalf of, the Obligors in
immediately available funds and desig nated for and sufficient to pay all
principal, premium, if any, and interest then due. The Obligors shall pay all
Liquidated Damages, if any, in the same manner on the dates and in the amounts
set forth in the Registration Rights Agreement.
The Obligors shall pay interest (including post-petition interest in
any proceeding under any Bankruptcy Law) on overdue principal at the rate equal
to the then applicable interest rate on the Notes to the extent lawful until
such overdue principal is paid; it shall pay interest (including post-petition
interest in any proceeding under any Bankruptcy Law) on overdue installments of
interest (without regard to any applicable grace period) at the same rate to the
extent lawful until such overdue installments of interest are paid.
The term "Bankruptcy Law" means title 11, U.S. Code or any similar
federal or state law for the relief of debtors.
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SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY.
The Obligors shall maintain an office or agency (which may be an
office of the Trustee or an affiliate of the Trustee, Registrar or co-registrar)
where Notes may be surrendered for registration of transfer or exchange and
where notices and demands to or upon the Obligors in respect of the Notes and
this Indenture may be served. The Obligors shall give prompt written notice to
the Trustee of the location, and any change in the location, of such office or
agency. If at any time the Obligors shall fail to maintain any such required
office or agency or shall fail to furnish the Trustee with the address thereof,
such presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee.
The Obligors may also from time to time designate one or more other
offices or agencies where the Notes may be presented or surrendered for any or
all such purposes and may from time to time rescind such designations; provided,
however, that no such designation or rescission shall in any manner relieve the
Obligors of their obligation to maintain an office or agency for such purposes.
The Obligors shall give prompt written notice to the Trustee of any such
designation or rescission and of any change in the location of any such other
office or agency.
The Obligors hereby designate the Corporate Trust Office of the
Trustee as one such office or agency of the Obligors in accordance with Section
2.03 hereof.
SECTION 4.03.REPORTS.
(a) So long as any of the Notes remain outstanding, the Obligors
shall cause copies of all quarterly and annual financial reports and of the
information, documents, and other reports (or copies of such portions of any of
the foregoing as the Securities and Exchange Commission (the "Commission") may
by rules and regulations prescribe) which any Obligor is required to file with
the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act ("SEC
Reports") to be filed with the Trustee within 15 days of filing with the
Commission. If any Obligor is not subject to the requirements of Section 13(a)
or 15(d) of the Exchange Act or shall cease to be required by the Commission to
file SEC Reports pursuant to the Exchange Act, the Obligor shall nevertheless
continue to cause SEC Reports, comparable to those which it would be required to
file pursuant to Section 13(a) or 15(d) of the Exchange Act if it were subject
to the requirements of either such section, to be so filed with the Commission
(unless the Commission will not accept such a filing) and with the Trustee
within the same time periods as would have applied (including under the
preceding sentence) had the Obligor been subject to the requirements of Section
13(a) or 15(d) of the Exchange Act. Whether or not required by the Exchange Act
to file SEC Reports with the Commission, so long as any Notes are outstanding,
the Obligors shall furnish copies of the SEC Reports to the holders of Notes at
the time the Obligors are required to file the same with the Trustee and make
such information available to investors who request it in writing. In addition,
the Obligors shall, for so long as any Notes remain outstanding, furnish to the
holders and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act. The Obligors shall also comply with the provisions of
TIA ss. 314(a).
(b) The Obligors shall provide the Trustee with a sufficient number
of copies of all SEC Reports that the Trustee may be required to deliver to the
holders of the Notes under this Section 4.03.
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SECTION 4.04. COMPLIANCE CERTIFICATE.
(a) Each Obligor shall deliver to the Trustee, within 90 days after
the end of each fiscal year of the Obligor, an Officers' Certificate stating
that (i) a review of the activities of the Obligors and their Restricted
Subsidiaries during the preceding fiscal year has been made under the
supervision of the signing Officers with a view to determining whether the
Obligors have (x) kept, observed, performed and fulfilled, and (y) caused each
of their Restricted Subsidiaries to keep, observe, perform and fulfill, its
obligations under this Indenture, and (ii) as to each such Officer signing such
certificate, that to the best of his or her knowledge (A) the Obligors have
kept, observed, performed and fulfilled, and have caused each of their
Restricted Subsidiaries to keep, observe, perform and fulfill, each and every
covenant contained in this Indenture and is not in default in the performance or
observance of any of the terms, provisions and conditions of this Indenture to
be performed or observed by it (or, if a Default or Event of Default shall have
occurred, describing all such Defaults or Events of Default of which he or she
may have knowledge and what action each is taking or proposes to take with
respect thereto) and (B) no event has occurred and remains in existence by
reason of which payments on account of the principal of or interest, if any, on
the Notes is prohibited or if such event has occurred, a description of the
event and what action each is taking or proposes to take with respect thereto.
(b) So long as not contrary to the then current recommendations of
the American Institute of Certified Public Accountants, the year-end financial
statements delivered pursuant to Section 4.03 above shall be accompanied by a
written statement of the Obligors' independent public accountants (who shall be
a firm of established national reputation) that in making the examination
necessary for certification of such financial statements, nothing has come to
their attention which would lead them to believe that either Obligor has
violated any provisions of Article 4 or Article 5 of this Indenture or, if any
such violation has occurred, specifying the nature and period of existence
thereof, it being understood that such accountants shall not be liable directly
or indirectly to any Person for any failure to obtain knowledge of any such
violation. In the event that such written statement of the Obligors' independent
public accountants can not be obtained, in whole or in part, each Obligor shall
deliver an Officers' Certificate certifying that it has used its best efforts to
obtain such statement but was unable to do so.
(c) Each Obligor shall, so long as any of the Notes are outstanding,
deliver to the Trustee, forthwith upon any Officer becoming aware of any Default
or Event of Default, an Officers' Certificate specifying such Default or Event
of Default and what action the Obligor is taking or proposes to take with
respect thereto.
(d) The Company shall deliver to the Trustee an Officers' Certificate
as required by, and in accordance with, Section 4.07(f) hereof.
SECTION 4.05. TAXES.
The Company shall pay, and shall cause each of its Restricted
Subsidiaries to pay, prior to delinquency, all material taxes, assessments, and
governmental levies, except as contested in good faith and by appropriate
proceedings or where the failure to effect such payment is not adverse in any
material respect to the holders of the Notes.
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SECTION 4.06. STAY, EXTENSION AND USURY LAWS.
Each Obligor covenants (to the extent that it may lawfully do so)
that it shall not at any time insist upon, plead, or in any manner whatsoever
claim or take the benefit or advantage of, any stay, extension or usury law
wherever enacted, now or at any time hereafter in force, that may affect the
covenants or the performance of this Indenture; and each Obligor (to the extent
that it may lawfully do so) hereby expressly waives all benefit or advantage of
any such law, and covenants that it shall not, by resort to any such law,
hinder, delay or impede the execution of any power herein granted to the
Trustee, but shall suffer and permit the execution of every such power as though
no such law has been enacted.
SECTION 4.07. RESTRICTED PAYMENTS.
(a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly:
(i) declare or pay any dividend or make any distribution on
account of any Equity Interests of the Company or any of its
Restricted Subsidiaries other than dividends or distributions payable
(A) in Equity Interests of the Company that are not Disqualified
Stock; (B) to the Company or any Restricted Subsidiary; (C) on
Disqualified Stock permitted to be incurred pursuant to Section 4.09
hereof; or (D) pro rata on Common Stock of Restricted Subsidiaries
held by minority stockholders;
(ii) purchase, redeem, defease, retire or otherwise acquire for
value ("Retire" and correlatively, a "Retirement") any Equity
Interests of the Company or any of its Restricted Subsidiaries or
other Affiliate of the Company (other than any such Equity Interests
owned by the Company or any Restricted Subsidiary);
(iii) Retire for value any Indebtedness of the Company that is
subordinate in right of payment to the Notes, except at final
maturity or in accordance with the mandatory redemption or repayment
provisions set forth in the original documentation governing such
Indebtedness; or
(iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being
collectively referred to as "Restricted Payments"), unless, at the
time of such Restricted Payment:
(1) no Default or Event of Default has occurred and is
continuing or would occur as a consequence of the Restricted
Payment;
(2) after giving effect to such Restricted Payment on a
pro forma basis as if such Restricted Payment had been made at
the beginning of the applicable four-quarter period, the Company
could incur at least $1.00 of additional Indebtedness pursuant
to the Consolidated Cash Flow Leverage Ratio test set forth in
Section 4.09(a) hereof; and
(3) such Restricted Payment, together with the aggregate
of all other Restricted Payments made by the Company and its
Restricted Subsidiaries after January 1, 2000
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(including any Restricted Payments made as permitted by clauses
(i), (v) and (vi) of Section 4.07(b)), minus any Restricted
Payment Credits, is less than the sum of
(x) 50% of the Consolidated Net Income of the
Company for the period (taken as one accounting
period) from January 1, 2000 to the end of the
Company's most recently ended fiscal quarter for
which internal financial statements are available at
the time of such Restricted Payment (or, if such
Consolidated Net Income for such period is a deficit,
less 100% of such deficit), plus
(y) 100% of the aggregate net cash proceeds
received by the Company from the issue or sale of
Equity Interests of the Company or of debt securities
or Disqualified Stock of the Company that have been
converted into such Equity Interests (other than
Equity Interests (or convertible debt securities)
sold to a Restricted Subsidiary of the Company and
other than Disqualified Stock or debt securities that
have been converted into Disqualified Stock) after
January 1, 2000 (other than any such Equity
Interests, the proceeds of which were used as set
forth in clause (b)(ii) below), plus
(z) for each issuance of Common Stock of the
Company after January 1, 2000 as consideration in a
transaction which results in either (a) a Person
becoming a Restricted Subsidiary, (b) a Person being
merged or consolidated with or into the Company or a
Restricted Subsidiary, or (c) a Person conveying all
or substantially all of its assets to the Company or
a Restricted Subsidiary, 100% of the product of (A)
the average Closing Price of the Common Stock for the
20 consecutive Trading Days immediately preceding the
date of issuance and (B) the number of shares of
Common Stock issued as consideration in the
transaction.
(b) The foregoing provisions in Section 4.07(a) shall not prohibit:
(i) the payment of any dividend within 60 days after the date
of declaration thereof, if at such date of declaration such payment
would have complied with the provisions of this Indenture;
(ii) the Retirement of (A) any Equity Interests of the Company
or any Restricted Subsidiary of the Company or (B) Indebtedness of
the Company that is subordinate to the Notes in exchange for, or out
of the proceeds of the substantially concurrent sale (other than to a
Restricted Subsidiary) of, Equity Interests of the Company (other
than Disqualified Stock);
(iii) the Retirement of any Indebtedness of the Company
subordinated in right of payment to the Notes in exchange for, or out
of the proceeds of the substantially concurrent incurrence of
Indebtedness of the Company (other than Indebtedness to a Restricted
Subsidiary of the Company), but only to the extent that such new
Indebtedness is permitted under Section 4.09 hereof and (1) is
subordinated in right of payment to the Notes at least to the same
extent as, (2) has a Weighted Average Life to Maturity at least as
long as and (3) has no scheduled principal payments due in any amount
earlier than, any equivalent amount of principal under the
Indebtedness so Retired;
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(iv) the Retirement of any Indebtedness of the Company in
exchange for, or out of the proceeds of the substantially concurrent
incurrence of Indebtedness of the Company or any Restricted
Subsidiary but only to the extent that such incurrence is permitted
under Section 4.09 hereof and only to the extent that such
Indebtedness (1) is not secured by any assets of the Company to a
greater extent than the Retired Indebtedness was so secured, (2) has
a Weighted Average Life to Maturity at least as long as the Retired
Indebtedness and (3) is pari passu or subordinated in right of
payment to the Notes at least to the same extent as the Retired
Indebtedness;
(v) the Retirement of any Equity Interests of the Company or
any Restricted Subsidiary or held by any member of the Company's (or
any of its Subsidiaries') management pursuant to any management
equity subscription agreement or stock option agreement; provided
that the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests may not exceed $1.0 million in
any twelve-month period plus the aggregate cash proceeds received by
the Company during such twelve-month period from any reissuance of
Equity Interests by the Company to members of management of the
Company and its Subsidiaries;
(vi) the payment of cash in lieu of fractional shares (A)
payable as dividends on Equity Interests of the Company; or (B)
issuable upon conversion of or in exchange for securities convertible
into or exchangeable for Equity Interests of the Company; or (C)
issuable as a result of a corporate reorganization; provided that, in
the case of (A) and (B), the issuance of Equity Interests or
securities and, in the case of (C), the corporate reorganization, is
permitted hereunder the Indenture;
(vii) the Retirement of Equity Interests of the Company that may
be deemed to occur upon the exercise of options to acquire Capital
Stock of the Company if options are used to pay all or a portion of
the exercise price of the options;
(viii) the Retirement of Equity Interests of a Restricted
Subsidiary to the extent required by applicable law as a result of
the exercise of dissenters' rights by minority shareholders of a
Person who becomes a Restricted Subsidiary; provided that the
aggregate amount paid for the Retirement of Equity Interests pursuant
to this clause (viii) may not exceed $25.0 million; and
(ix) other Restricted Payments made by the Company or any
Restricted Subsidiary, provided that the aggregate amount of all
Restricted Payments made pursuant to this clause (ix) may not exceed
$2.0 million;
provided, except in the case of clauses (i), (ii), (iii), (iv), and (vii), no
Default or Event of Default shall have occurred and be continuing or occur as a
consequence of the actions or payments set forth therein.
(c) A Permitted Investment that ceases to be a Permitted Investment
pursuant to the definition thereof set forth in Section 1.01 hereof, shall
become a Restricted Investment, deemed to have been made on the date that it
ceases to be a Permitted Investment.
(d) The Board of Directors of the Company may designate any
Subsidiary to be an Unrestricted Subsidiary if such designation would not cause
a Default or an Event of Default pursuant to Article 6 hereof, provided,
however, the Company may not designate Mpower or any Subsidiary which holds any
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permit or license which is material to the operations of the Company and its
Restricted Subsidiaries taken as a whole as an Unrestricted Subsidiary. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash) in
such Subsidiary so designated shall be deemed to be Restricted Payments at the
time of such designation, except to the extent repaid in cash, and shall reduce
the amount available for Restricted Payments under paragraph (a) of this Section
4.07. All such outstanding Investments will be deemed to constitute Investments
in an amount equal to the greatest of (x) the net book value of such Investments
at the time of such designation, (y) the fair market value of such Investments
at the time of such designation and (z) the original fair market value of such
Investments at the time they were made. Such designation will only be permitted
if such Restricted Payment would be permitted at such time.
(e) The Board of Directors of the Company may at any time designate
any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if (i) such Indebtedness
is permitted under Section 4.09 hereof and (ii) no Default or Event of Default
pursuant to Article 6 hereof would be in existence following such designation.
(f) Not later than the date of making any Restricted Payment, the
Company shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by this Section 4.07 were computed, which calculations may
be based upon the Company's latest available financial statements. The Trustee
shall have no duty or obligation to confirm or verify the calculations set forth
in such Officers' Certificate.
SECTION 4.08. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause to become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to:
(i) pay dividends or make any other distributions to the
Company or any of its Restricted Subsidiaries on its Capital Stock or
with respect to any other interest or participation in, or measured
by, its profits, or pay any Indebtedness owed to the Company or any
of its Restricted Subsidiaries;
(ii) make loans or advances to the Company or any of its
Restricted Subsidiaries; or
(iii) transfer any of its properties or assets to the Company
or any of its Restricted Subsidiaries.
The foregoing shall not restrict any encumbrances or restrictions:
(a) existence on the Issue Date;
(b) existing under or by reason of applicable law;
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(c) existing with respect to any Person or the property or
assets of a Person acquired by the Company or any Restricted
Subsidiary, existing at the time of the acquisition and not incurred
in contemplation of such acquisition, which encumbrances or
restrictions are not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or
assets of the Person, so acquired;
(d) existing by reason of customary non-assignment provisions in
leases entered into in the normal course of business and consistent
with past practices;
(e) existing under or by reason of Indebtedness in respect of a
Permitted Refinancing, provided that the restrictions contained in
the agreements governing such Refinancing Indebtedness are not
materially more restrictive than those contained in the agreements
governing the Indebtedness being refinanced;
(f) with respect to clause (iii) above, existing under or by
reason of performance bonds or similar security for performance which
encumbrances or restrictions do not cover any asset other than the
asset associated with the Company's performance;
(g) existing under or by reason of Indebtedness incurred under
Section 4.09(b)(i) or (b)(ii) hereof;
(h) existing under or by reason of this Indenture and the
Notes; or
(i) with respect to a Restricted Subsidiary, imposed pursuant to
an agreement that has been entered into for the sale or disposition
of all or substantially all of the Capital Stock of, or property and
assets of, the Restricted Subsidiary, provided the sale or
disposition is permitted by the terms of this Indenture; or
(i) in the case of clauses (a), (c), (d), (e), (f), (g), (h) and
(i) above, any amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or
refinancings thereof, provided that such amendments,
modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are not materially more
restrictive with respect to such dividend and other payment
restrictions than those contained in such instruments as in
effect on the date of their incurrence or, if later, the Issue
Date.
SECTION 4.09. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED STOCK.
(a) The Company and its Restricted Subsidiaries shall not, directly or
indirectly, (i) create, incur, issue, assume, guarantee or otherwise become
directly or indirectly liable for the payment of (collectively, "incur" and,
correlatively, "incurred" and "incurrence") any Indebtedness (including, without
limitation, Acquired Debt) or (ii) issue any Disqualified Stock; provided,
however, that the Company and/or any of its Restricted Subsidiaries may incur
Indebtedness (including, without limitation, Acquired Debt) or issue shares of
Disqualified Stock if, after giving effect to the incurrence of such
Indebtedness or the issuance of such Disqualified Stock, the Consolidated Cash
Flow Leverage Ratio for the Company, determined on a pro forma basis (including
a pro forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Disqualified Stock had been issued at the
beginning of the period
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used to calculate the Consolidated Cash Flow Leverage Ratio, does not exceed 6.0
to 1. If the Company incurs any Indebtedness or issues or redeems any Preferred
Stock subsequent to the commencement of the period for which such ratio is being
calculated but prior to the event for which the calculation of the ratio is
made, then the ratio will be calculated giving pro forma effect to any such
incurrence of Indebtedness, or such issuance or redemption of Preferred Stock,
as if the same had occurred at the beginning of the applicable period. In making
such calculation on a pro forma basis, interest attributable to Indebtedness
bearing a floating interest rate shall be computed as if the rate in effect on
the date of computation had been the applicable rate for the entire period.
(b) The foregoing limitation in Section 4.09(a) shall not apply to (with
each exception to be given independent effect):
(i) the incurrence by the Company and/or any of its Restricted
Subsidiaries of Indebtedness under the Credit Facility in an
aggregate principal amount at any one time outstanding (with letters
of credit being deemed to have a principal amount equal to the
maximum potential liability of the Company and/or any of its
Restricted Subsidiaries under the letters of credit) not to exceed
$150.0 million in the aggregate at any one time outstanding, less the
aggregate amount of all Net Proceeds of Asset Sales applied to
permanently reduce the commitments with respect to such Indebtedness
pursuant to Section 4.10 hereof;
(ii) the incurrence by the Company and/or any of its Restricted
Subsidiaries of Vendor Indebtedness, provided that the aggregate
amount of such Vendor Indebtedness incurred does not exceed 100% of
the total cost of the Telecommunications Related Assets financed with
Vendor Indebtedness;
(iii) the incurrence by the Company and/or any of its Subsidiaries of
the Existing Indebtedness;
(iv) the incurrence by the Company and/or any of its Restricted
Subsidiaries of Indebtedness in an aggregate amount not to exceed
$25.0 million at any one time outstanding;
(v) the incurrence by the Company of Indebtedness, but only to the
extent the Indebtedness has a final maturity no earlier than the
final maturity of the Notes and a Weighted Average Life to Maturity
equal to or greater than the Weighted Average Life to Maturity of the
Notes, in an aggregate principal amount not to exceed 2.0 times the
sum of the net cash proceeds received by the Company after January 1,
2000 from the issuance and sale of Equity Interests of the Company,
other than Disqualified Stock, or the issuance and sale of debt
securities or Disqualified Stock of the Company that have been
converted into Equity Interests, in each case, other than Equity
Interests or convertible debt securities sold to a Restricted
Subsidiary, plus the fair market value of Equity Interests, other
than Disqualified Stock, or the issuance and sale of debt securities
or Disqualified Stock of the Company that have been converted into
Equity Interests, issued after January 1, 2000 in connection with an
acquisition of a Telecommunications Business or Telecommunications
Related Assets;
(vi) the incurrence (a "Permitted Refinancing") by the Company and/or
any of its Restricted Subsidiaries of Indebtedness issued in exchange
for, or the proceeds of which are used to refinance, replace, refund
or defease ("Refinance" and correlatively, "Refinanced" and
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"Refinancing") Indebtedness, other than Indebtedness incurred
pursuant to clause (i) above, but only to the extent that:
(1) the net proceeds of such Refinancing Indebtedness
shall not exceed the principal amount of and premium, if any,
and accrued interest on the Indebtedness so Refinanced (or if
such Indebtedness was issued at an original issue discount, the
original issue price plus amortization of the original issue
discount at the time of the repayment of the Indebtedness so
Refinanced) plus the fees, expenses and costs of such
Refinancing and prepayment premiums, if any, in connection with
the Refinancing;
(2) the Refinancing Indebtedness shall have a final
maturity no earlier than, and a Weighted Average Life to
Maturity equal to or greater than, the final maturity and
Weighted Average Life to Maturity of the Indebtedness being
Refinanced; and
(3) if the Indebtedness being Refinanced is
subordinated in right of payment to the Notes, the Refinancing
Indebtedness shall be subordinated in right of payment to the
Notes on terms at least as favorable to the holders of Notes as
those contained in the documentation governing the Indebtedness
being so Refinanced;
(vii) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the
Company and any of its Restricted Subsidiaries;
(viii) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the purpose
of fixing or hedging interest rate or foreign currency risk with
respect to any floating rate Indebtedness that is permitted by the
terms of this Indenture to be outstanding;
(ix) the incurrence of Acquired Debt, to the extent that the
principal amount of the Acquired Debt does not exceed the aggregate
book value of the Telecommunications Related Assets acquired
concurrently with the incurrence of the Acquired Debt; and
(x) the incurrence by the Company of Indebtedness to the extent the
net proceeds thereof are promptly:
(1) used to purchase Notes tendered in a Change of
Control Offer made as a result of a Change of Control; or
(2) deposited to defease the Notes as described below
in Article 8.
For purposes of determining compliance with this Section 4.09, in the
event that an item of Indebtedness meets the criteria of more than one of the
categories described in clauses (i) through (ix) above or is entitled to be
incurred pursuant to Section 4.09(a), the Company, in its sole discretion, may
classify, and may from time to time reclassify, such item in any manner that
complies with this Section and such item shall be treated as having been
incurred pursuant to only one of such clauses or pursuant to Section 4.09(a).
Accrual of interest or dividends, the accretion of accreted value or liquidation
preference and the payment of interest or dividends in the form of additional
Indebtedness, Common Stock or Preferred Stock shall not be deemed to be an
incurrence of Indebtedness for purposes of this Section.
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SECTION 4.10. ASSET SALES.
(a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, whether in a single transaction or a series of related
transactions occurring within any twelve-month period,
(i) sell, lease, convey, dispose or otherwise transfer any
assets (including by way of a Sale and Leaseback Transaction) other
than sales, leases, conveyances, dispositions or other transfers (A)
in the ordinary course of business, (B) to the Company by any
Restricted Subsidiary or from the Company to any Restricted
Subsidiary, (C) that constitute a Restricted Payment, Investment or
dividend or distribution permitted under Section 4.07 hereof or (D)
that constitute the disposition of all or substantially all of the
assets of the Company pursuant to Section 5.01 hereof or
(ii) issue or sell Equity Interests in any of its Restricted
Subsidiaries (other than an issuance or sale of Equity Interests of
any such Restricted Subsidiary to the Company or a Restricted
Subsidiary);
if the assets or securities
(x) have a Fair Market Value in excess of $2.0 million (excluding the
Fair Market Value of Telecommunications Equipment sold to ILECs in
connection with establishing virtual collocation arrangements with
such ILECs) or
(y) are sold or otherwise disposed of for Net Proceeds in excess of
$2.0 million (each of the foregoing, an "Asset Sale"), unless:
(a) no Default or Event of Default exists or would occur as a
result of the Asset Sale;
(b) the Company, or such Restricted Subsidiary, as the case may
be, receives (except in the case of sales of Telecommunications
Equipment to ILECs in connection with establishing virtual
collocations arrangements with such ILECs) consideration at the time
of such Asset Sale at least equal to the Fair Market Value of the
assets or securities issued or sold or otherwise dispose of evidenced
by a resolution of the Board of Directors of the Company set forth in
an Officers' Certificate delivered to the Trustee; and
(c) at least 75% of the consideration therefor received by the
Company or such Restricted Subsidiary is in the form of cash,
provided that (A) the amount of (x) any liabilities (as shown on the
Company's or such Restricted Subsidiary's most recent balance sheet
or in the notes thereto), of the Company or any Restricted Subsidiary
of the Company (other than liabilities that are by their terms
subordinated to the Notes) that are assumed by the transferee of any
of the assets pursuant to a customary novation agreement that
releases the Company or the Restricted Subsidiary from further
liability, and (y) any notes, obligations or other securities
received by the Company or any such Restricted Subsidiary from such
transferee that are immediately converted by the Company or such
Restricted Subsidiary into cash, shall be deemed to be cash (to the
extent of the cash received in the case of subclause (y)) for
purposes of this clause (c); and (B) an amount equal to the Fair
Market Value (determined as set forth in clause (b) above) of
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Telecommunications Related Assets received by the Company or any such
Restricted Subsidiary in connection with the Asset Sale that will be
used by the Company or any such Restricted Subsidiary in the
operation of a Telecommunications Business in the United States shall
be deemed to be cash for purposes of this clause (c).
The foregoing provisions shall not apply to a sale, lease, conveyance
or other disposition of all or substantially all of the assets of the Company,
which shall be governed by Article 5 hereof.
(b) Within 365 days after the receipt of Net Proceeds of any Asset
Sale, the Company (or such Restricted Subsidiary, as the case may be) may apply
the Net Proceeds from such Asset Sale to (i) permanently reduce the amounts
permitted to be borrowed by the Company under the terms of any of its Senior
Indebtedness; (ii) the purchase of Telecommunications Related Assets or Voting
Stock of any Person engaged in the Telecommunications Business in the United
States (provided that such Person concurrently becomes a Restricted Subsidiary
of the Company) or (iii) make a Voluntary Excess Proceeds Offer as permitted by
Section 3.09. Any Net Proceeds from any Asset Sales that are not so applied or
invested as provided in the preceding sentence, shall constitute "Excess
Proceeds." When the aggregate amount of Excess Proceeds exceeds $10.0 million,
the Company shall be required to make an Excess Proceeds Offer in accordance
with the terms of Section 3.09 hereof.
SECTION 4.11. TRANSACTIONS WITH AFFILIATES.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, sell, lease, transfer or otherwise dispose of any of their
respective properties or assets to, or purchase any property or assets from, or
enter into any contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless: (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person; (ii) such Affiliate Transaction
is approved by a majority of the disinterested directors on the Board of
Directors of the Company; and (iii) the Company delivers to the Trustee, with
respect to any Affiliate Transaction involving aggregate payments in excess of
$5.0 million, a resolution of a committee of independent directors of the
Company set forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clauses (i) and (ii) above and (iv) the Company
delivers to the Trustee with respect to any Affiliate Transaction involving
aggregate payments in excess of $10.0 million, an opinion of an Independent
Appraiser that such Affiliate Transaction are fair to the Company or the
Restricted Subsidiary, as the case may be, from a financial point of view;
provided that (a) transactions pursuant to any employment, stock option or stock
purchase agreement entered into by the Company or any of its Restricted
Subsidiaries, or any grant, issuance or sale of stock, in the normal course of
business that are approved by the Board of Directors of the Company, (b)
transactions between or among the Company and its Restricted Subsidiaries, (c)
transactions permitted by Section 4.07 hereof, (d) loans and advances to
employees and officers of the Company or any of its Restricted Subsidiaries in
the normal course of business in an aggregate principal amount not to exceed
$1.0 million at any one time outstanding and (e) transactions pursuant to
existing contracts to which the Company is a party in accordance with the terms
of such contracts as they exist on the Issue Date, shall be deemed not to be
Affiliate Transactions.
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SECTION 4.12. LIENS.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien on any asset now owned or hereafter acquired, or any income or
profits therefrom or assign or convey any right to receive income therefrom,
except for Permitted Liens.
SECTION 4.13. LIMITATIONS ON SALE AND LEASEBACK TRANSACTIONS.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into, assume, Guarantee or
otherwise become liable with respect to any Sale and Leaseback Transaction,
provided that the Company or any Restricted Subsidiary of the Company may enter
into any such transaction if (i) the Company or such Restricted Subsidiary would
be permitted under Sections 4.09 and 4.12 hereof to incur secured Indebtedness
in an amount equal to the Attributable Debt with respect to such transaction,
(ii) the consideration received by the Company or such Restricted Subsidiary
from such transaction is at least equal to the Fair Market Value of the property
being transferred, and (iii) the Net Proceeds received by the Company or such
Restricted Subsidiary from such transaction are applied in accordance with
Section 4.10 hereof.
SECTION 4.14. CORPORATE EXISTENCE.
Subject to Article 5 hereof, the Company shall do or cause to be done
all things necessary to preserve and keep in full force and effect (i) its
existence as a corporation, and the corporate, partnership or other existence of
any Restricted Subsidiary, in accordance with the respective organizational
documents (as the same may be amended from time to time) of the Company or any
such Restricted Subsidiary and (ii) the rights (charter and statutory), licenses
and franchises of the Company and its Restricted Subsidiaries; provided,
however, that the Company shall not be required to preserve any such right,
license or franchise, or the corporate, partnership or other existence of any of
its Restricted Subsidiaries if the Board of Directors of the Company shall
determine that the preservation thereof is no longer desirable in the conduct of
the business of the Company and its Restricted Subsidiaries, taken as a whole,
and that the loss thereof is not adverse in any material respect to the holders
of the Notes.
SECTION 4.15. OFFER TO PURCHASE UPON CHANGE OF CONTROL.
(a) Upon the occurrence of a Change of Control, the Company shall
make an offer (the "Change of Control Offer") to each holder of Notes to
repurchase all or any part (equal to $1,000 or an integral multiple thereof) of
such holder's Notes at a purchase price equal to 101% of the aggregate principal
amount thereof of the Notes plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of purchase (the "Change of Control
Payment"), provided that if the date of purchase is on or after an interest
record date and on or before the related interest payment date, any accrued
interest shall be paid to the Person in whose name a Note is registered at the
close of business on such record date, and no additional interest shall be paid
or payable to holders who tender Notes pursuant to the Change of Control Offer.
Within thirty (30) days following any Change of Control, the Company shall mail
a notice to the Trustee and each holder stating: (1) that the Change of Control
Offer is being made pursuant to this
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Section 4.15 and that all Notes or portions thereof tendered will be accepted
for payment; (2) the purchase price and the purchase date, which shall be no
earlier than 30 days nor later than 40 days (unless required by applicable law)
from the date such notice is mailed (the "Change of Control Payment Date"); (3)
that any Note or portion thereof not tendered will continue to accrue interest
in accordance with its terms; (4) that, unless the Company defaults in the
payment of the Change of Control Payment, all Notes or portions thereof accepted
for payment pursuant to the Change of Control Offer shall cease to accrue
interest after the Change of Control Payment Date; (5) that holders electing to
have any Notes or portions thereof purchased pursuant to a Change of Control
Offer will be required to surrender the Notes, with the form entitled "Option of
Holder to Elect Purchase" on the reverse of the Notes completed, to the Paying
Agent at the address specified in the notice prior to the close of business on
the third Business Day preceding the Change of Control Payment Date; (6) that
holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the second Business Day
preceding the Change of Control Payment Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the holder, the principal
amount of Notes or portions thereof delivered for purchase, and a statement that
such holder is withdrawing his election to have such Notes or portions thereof
purchased; and (7) that holders whose Notes are being purchased only in part
will be issued new Notes equal in principal amount to the unpurchased portion of
the Notes surrendered, which unpurchased portion must be equal to $1,000 in
principal amount or an integral multiple thereof. The Company shall comply with
the requirements of Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes or portions thereof in
connection with a Change of Control.
(b) On the Change of Control Payment Date, the Company shall, to the
extent lawful, (i) accept for payment Notes or portions thereof tendered
pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (iii) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
Notes or portions thereof tendered to the Company. The Paying Agent shall
promptly mail to each holder of Notes so accepted payment in an amount equal to
the purchase price for such Notes or portions thereof, and the Trustee shall
promptly authenticate and mail to each holder a new Note equal in principal
amount to any unpurchased portion of the Notes surrendered, if any; provided,
that each such new Note shall be in a principal amount of $1,000 or an integral
multiple thereof. The Company shall publicly announce the results of the Change
of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
SECTION 4.16. BUSINESS ACTIVITIES.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, engage in any business other than the
Telecommunications Business.
SECTION 4.17. INSURANCE.
The Company shall and shall cause each of its Restricted Subsidiaries
to at all times keep all of their respective properties which are of an
insurable nature insured, with insurers believed by the Company in good faith to
be financially sound and responsible.
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SECTION 4.18. PAYMENTS FOR CONSENT.
No Obligor shall, or shall not permit any of its Affiliates to,
directly or indirectly, pay or cause to be paid any consideration, whether by
way of interest, fee or otherwise, to any holder of any Notes for or as an
inducement to any consent, waiver or amendment of any of the terms or provisions
of this Indenture or the Notes unless such consideration is offered to be paid
or agreed to be paid to all holders of the Notes that consent, waive or agree to
amend in the time frame set forth in the solicitation documents relating to such
consent, waiver or agreement.
ARTICLE 5
SUCCESSORS; RELEASE
SECTION 5.01. MERGER, CONSOLIDATION OR SALE OF ASSETS.
The Company shall not consolidate or merge with or into (whether or
not the Company is the surviving entity), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions to another corporation, Person or
entity unless:
(i) the Company is the surviving entity or the entity or Person
formed by or surviving any such consolidation or merger (if other
than the Company) or to which such sale, assignment, transfer, lease,
conveyance or other disposition has been made is a corporation
organized or existing under the laws of the United States, any state
of the United States or the District of Columbia;
(ii) the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company) or the entity or
Person to which such sale, assignment, transfer, lease, conveyance or
other disposition has been made (if other than a wholly-owned
Restricted Subsidiary) assumes all the obligations of the Company
under the Notes and this Indenture pursuant to a supplemental
indenture in form reasonably satisfactory to the Trustee;
(iii) immediately after such transaction no Default or Event of
Default exists;
(iv) except in connection with a merger or consolidation with or
into a wholly-owned Restricted Subsidiary or a sale, assignment,
transfer, lease, conveyance or other disposition to a wholly-owned
Restricted Subsidiary, the Company, or any entity or Person formed by
or surviving any such consolidation or merger, or to which such sale,
assignment, transfer, lease, conveyance or other disposition has been
made, at the time of such transaction after giving pro forma effect
thereto as if such transaction had occurred at the beginning of the
applicable fiscal quarter (including any Indebtedness incurred or
anticipated to be incurred in connection with or in respect
of such transaction or series of transactions), could either (A)
incur at least $1.00 of additional Indebtedness pursuant to the
Consolidated Cash Flow Leverage Ratio test described under Section
4.09 hereof or (B) would have (x) Total Market Capitalization of at
least $1.0 billion and (y) total Indebtedness (net of cash and cash
equivalents that are not restricted cash or restricted cash
equivalents as reflected on the Company's consolidated balance sheet
as of the time of such event) in an amount not greater than 30% of
its Total Market Capitalization;
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(v) such transaction would not result in the loss, material
impairment or adverse modification or amendment of any authorization
or license of the Company or its Restricted Subsidiaries that would
have a material adverse effect on the business or operations of the
Company and its Restricted Subsidiaries taken as a whole; and
(vi) the Company has delivered to the Trustee an Officer's
Certificate and an Opinion of Counsel each to the effect that, with
respect to the transaction, items (i) through (v) as stated above
have been satisfied.
SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED.
Upon any consolidation or merger, or any sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company in
accordance with Section 5.01 hereof, the successor corporation formed by such
consolidation or into or with which the Company is merged or to which such sale,
lease, conveyance or other disposition is made shall succeed to, and be
substituted for (so that from and after the date of such consolidation, merger,
sale, lease, conveyance or other disposition, the provisions of this Indenture
referring to the Company shall refer instead to the successor corporation and
not to the Company), and may exercise every right and power of the Company under
this Indenture with the same effect as if such successor Person had been named
as the Company, herein; provided, however, that the predecessor Company shall
not be relieved from the obligations to pay the principal of, premium, if any,
and interest on the Notes, except in the case of a sale of all of the Company's
assets that meets the requirements of Section 5.01 hereof.
SECTION 5.03. OPTION TO RELEASE MGC.
(a) MGC may, at the option of its Board of Directors evidenced by a
resolution set forth in an Officers' Certificate and upon compliance with the
conditions set forth in Section 5.03(c) below, elect to have all of its
obligations under this Indenture and the Notes automatically released and
discharged without any action required on the part of the holders of the Notes,
at any time when:
(i) less than 33 1/3 % of the aggregate principal amount of the
Existing Notes originally issued are outstanding; and
(ii) Mpower owns 100% of the issued and outstanding Equity
Interests of MGC and owns any outstanding debt securities convertible
into or exchangeable for Equity Interests of MGC.
(b) Upon MGC's exercise of its option under Section 5.03(a), MGC
shall be automatically released and discharged from all of its obligations with
respect to the Indenture and all outstanding Notes on the date the conditions
set forth in Section 5.03(c) are satisfied (hereinafter, the "Release") and the
Trustee, on demand of and at the expense of MGC, shall execute proper
instruments acknowledging the same.
(c) The following shall be the conditions to the application of
Section 5.03(a):
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(i) Each Obligor shall have delivered to the Trustee an Opinion
of Counsel in the United States reasonably acceptable to the Trustee
confirming that: (x) the holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a
result of such Release (other than income, gain or loss in respect of
the Notes at the time and in the amounts as would have been the case
had such Release not occurred) and (y) after the Release, the Notes
will be as freely tradeable under the Securities Act as they were
immediately prior to the Release; provided, however, if the Opinion
of Counsel required by clause (x) cannot be obtained, the provisions
of this Section 5.03(c)(i) shall nonetheless be satisfied if Mpower
agrees, pursuant to a supplemental indenture between Mpower and the
Trustee, to promptly pay to each holder of outstanding Notes such
additional amounts as will be sufficient to make each holder whole as
if the Release had not occurred.
(ii) No Default or Event of Default shall have occurred and be
continuing on the date of such Release:
(iii) Immediately following the effectiveness of the Release,
MGC or its successor entity is a Restricted Subsidiary of Mpower;
(iv) Such Release shall not result in a breach or violation of,
or constitute a default under, any material agreement or instrument
to which either Obligor or any of their respective Subsidiaries is a
party or by which any of them are bound; and
(v) Each Obligor shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that
all conditions precedent to the effectiveness of the Release have
been complied with.
(d) If, in the opinion of counsel to the Obligors, it is necessary to
exchange the outstanding Notes for new notes of Mpower ("New Notes") in order to
properly effectuate the Release and comply with applicable federal and state
securities laws, then the Notes shall be mandatorily exchangeable into New Notes
provided that such exchange (the "New Note Exchange") shall not commence until
the Obligors have provided to the Trustee an Opinion of Counsel in the United
States reasonably acceptable to the Trustee that (i) other than such changes as
are necessary to reflect that MGC is not longer an Obligor under the Indenture
and the Notes, the terms of the New Notes are identical to the Notes; (ii) the
holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of the New Note Exchange (other than
income, gain or loss in respect of the New Notes at the time and in the amounts
as would have been the case had such New Note Exchange not occurred); and (iii)
the New Notes shall be as freely tradeable under the Securities Act as they were
immediately before the New Note Exchange.
ARTICLE 6
DEFAULTS AND REMEDIES
SECTION 6.01. EVENTS OF DEFAULT.
Each of the following constitutes an "Event of Default":
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(a) default for 30 days in the payment when due of interest or
Liquidated Damages, if any, on the Notes;
(b) default in payment when due of principal or premium, if any, on
the Notes at maturity, upon redemption or otherwise;
(c) failure by the Company to perform or comply with the provisions
of Sections 4.07, 4.09, 4.10, 4.15 or 5.01 hereof;
(d) failure by any Obligor for 30 days after notice to the Obligors
from the Trustee or to the Obligors and the Trustee by the
holders of at least 25% in principal amount of the Notes then
outstanding to comply with its other agreements in this
Indenture or the Notes;
(e) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Company or
any of its Restricted Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Restricted
Subsidiaries), whether such Indebtedness or Guarantee now
exists, or is created after the Issue Date, which default (x) is
caused by a failure to pay when due principal, premium, if any,
or interest on such Indebtedness within the grace period
provided in such Indebtedness (a "Payment Default"), and the
principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness of the Company
or any Significant Subsidiary under which there has been a
Payment Default or the maturity of which has been accelerated as
provided in clause (y), aggregates $5.0 million or more or (y)
results in the acceleration (which acceleration has not been
rescinded) of such Indebtedness prior to its express maturity
and the principal amount of any such Indebtedness, together with
the principal amount of any other such Indebtedness under which
there has been a Payment Default or the maturity of which has
been so accelerated, aggregates $5.0 million or more;
(f) failure by the Company or any of its Significant Subsidiaries to
pay final judgments (other than any judgment as to which a
reputable insurance company has accepted full liability in
writing) aggregating in excess of $5.0 million, which judgments
are not paid, discharged or stayed within 45 days after their
entry; and
(g) the Company or any of its Significant Subsidiaries pursuant to
or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case,
(B) consents to the entry of an order for relief against
it in an involuntary case,
(C) consents to the appointment of a Custodian of it or
for all or substantially all of its property,
(D) makes a general assignment for the benefit of its
creditors, or
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(E) admits in writing that it is generally not paying its
debts (other than debts which are the subject of a bona fide
dispute) as they become due;
(h) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that;
(A) is for relief against the Company or any of its
Significant Subsidiaries in an involuntary case;
(B) appoints a Custodian of the Company or any of its
Significant Subsidiaries or for all or substantially all of the
property of the Company or any of its Significant Subsidiaries;
or
(C) orders the liquidation of the Company or any of its
Significant Subsidiaries;
and the order or decree remains unstayed and in effect for 60
consecutive days; provided, however; that if the entry of such
order or decree is appealed and dismissed on appeal or otherwise
has ceased to be in effect, then the Event of Default hereunder
by reason of the entry of such order or decree shall be deemed
to have been cured and the related acceleration, provided that
no other Event of Default has occurred and is continuing, shall
be deemed rescinded.
The term "Custodian" means any receiver, trustee, assignee,
liquidator or similar official under any Bankruptcy Law.
SECTION 6.02. ACCELERATION.
If any Event of Default occurs and is continuing under this
Indenture, the Trustee, by notice to the Obligors, or the holders of at least
25% in principal amount of the Notes then outstanding, by notice to the Obligors
and the Trustee, may declare all the Notes to be due and payable immediately.
Upon such declaration, the principal of, premium, if any, and accrued and unpaid
interest and Liquidated Damages, if any, on the Notes shall be due and payable
immediately. Notwithstanding the foregoing, in the case of an Event of Default
arising under Sections 6.01(g) or (h) hereof with respect to the Company or any
of its Significant Subsidiaries, the foregoing amount shall ipso facto become
due and payable without further action or notice. No premium is payable upon
acceleration of the Notes except that in the case of an Event of Default that is
the result of an action or inaction by the Company or any of its Restricted
Subsidiaries intended to avoid restrictions on or premiums related to
redemptions of the Notes contained in this Indenture or the Notes, the amount
declared due and payable shall include the premium that would have been
applicable on a voluntary prepayment of the Notes or, if voluntary prepayment is
not then permitted, the premium set forth in this Indenture. Holders of the
Notes may not enforce this Indenture or the Notes except as provided herein.
In the case of any Event of Default occurring by reason of any
willful action (or inaction) taken (or not taken) by or on behalf of the Company
or any Restricted Subsidiary with the intention of avoiding payment of the
premium that the Company would have had to pay if the Company then had elected
to redeem the Notes pursuant to Section 3.07 hereof, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law.
If an Event of Default occurs prior to April
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1, 2005 by reason of any willful action (or inaction) taken (or not taken) by or
on behalf of the Company or any Restricted Subsidiary with the intention of
avoiding the prohibition on redemption of the Notes prior to such date pursuant
to Section 3.07 hereof, then the premium payable for purposes of this paragraph
for each of the years beginning on April 1 of the years set forth below shall be
as set forth in the following table, expressed as a percentage of the amount
that would otherwise be due but for the provisions of this paragraph, plus
accrued interest, if any, to the date of payment:
Year Percentage
2000...................................... 113.000%
2001...................................... 111.700%
2002...................................... 110.400%
2003...................................... 109.100%
2004...................................... 107.800%
SECTION 6.03. OTHER REMEDIES.
If an Event of Default occurs and is continuing, the Trustee
may pursue any available remedy to collect the payment of principal of, premium,
if any, interest and Liquidated Damages, if any, on the Notes or to enforce the
performance of any provision of the Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not
possess any of the Notes or does not produce any of them in the proceeding. A
delay or omission by the Trustee or any holder of a Note in exercising any right
or remedy accruing upon an Event of Default shall not impair the right or remedy
or constitute a waiver of or acquiescence in the Event of Default. All remedies
are cumulative to the extent permitted by law.
SECTION 6.04. WAIVER OF PAST DEFAULTS.
Except as set forth in Section 6.02, holders of not less than
a majority in aggregate principal amount of the Notes then outstanding, by
notice to the Trustee, may on behalf of the holders of all of the Notes, waive
any existing Default or Event of Default and its consequences. Upon any such
waiver, such Default shall cease to exist, and any Event of Default arising
therefrom shall be deemed to have been cured for every purpose of this
Indenture; but no such waiver shall extend to any subsequent or other Default or
impair any right consequent thereon.
SECTION 6.05. CONTROL BY MAJORITY.
Holders of a majority in principal amount of the then outstanding
Notes may direct the time, method and place of conducting any proceeding for
exercising any remedy available to the Trustee or exercising any trust or power
conferred on it. However, the Trustee may refuse to follow any direction that
conflicts with the law or this Indenture that the Trustee, in its sole
discretion, determines may be unduly prejudicial to the rights of other holders
of Notes or that may involve the Trustee in personal liability. The Trustee may
take any other action which it deems proper which is not inconsistent with any
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such direction. Notwithstanding any provision to the contrary in this Indenture,
the Trustee shall not be obligated to take any action with respect to the
provisions of the last paragraph of Section 6.02 hereof unless directed to do so
pursuant to this Section 6.05.
SECTION 6.06. LIMITATION ON SUITS.
No holder of any Note shall have any right to institute any
proceeding with respect to this Indenture or the Notes or for any remedy
thereunder, unless:
(i) the holder of a Note gives to the Trustee written notice
of a continuing Event of Default;
(ii) the holders of at least 25% in principal amount of the
then outstanding Notes make a written request to the Trustee to pursue
the remedy;
(iii) such holder of a Note or holders of the Notes offer and,
if requested, provide to the Trustee indemnity satisfactory to the
Trustee against any loss, liability or expense; and
(iv) the Trustee does not comply with the request within 60
days after receipt of the request and the offer and, if requested, the
provision of indemnity.
Otherwise, no holder of any Note shall have any right to
institute any proceeding with respect to this Indenture or the Notes or for any
remedy thereunder, except:
(x) a holder of a Note may institute suit for enforcement of
payment of the principal of and premium, if any, or interest on such Note on or
after the respective due dates expressed in Liquidated Damages, if any, such
Note (including upon acceleration thereof) or
(y) the holders of a majority of the principal amount of Notes
then outstanding may institute any proceeding with respect to this Indenture, or
the Notes or any remedy thereunder, including without limitation acceleration,
provided that, upon institution of any proceeding or exercise of any remedy such
holders provide the Trustee with prompt written notice thereof.
A holder of a Note may not use this Indenture to prejudice the
rights of another holder of a Note or to obtain a preference or priority over
another holder of a Note.
SECTION 6.07. RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT.
Notwithstanding any other provision of this Indenture, the
right of any holder of a Note to receive payment of principal, premium and
Liquidated Damages, if any, and interest on the Note, on or after the respective
due dates expressed in the Note, or to bring suit for the enforcement of any
such payment on or after such respective dates, shall not be impaired or
affected without the consent of the holder of the Note.
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SECTION 6.08. COLLECTION SUIT BY TRUSTEE.
If an Event of Default specified in Section 6.01(a) or (b)
hereof occurs and is continuing, the Trustee is authorized to recover judgment
in its own name and as trustee of an express trust against the Obligors for the
whole amount of principal of, premium and Liquidated Damages, if any, and
interest remaining unpaid on the Notes and interest on overdue principal and, to
the extent lawful, interest and such further amount as shall be sufficient to
cover the costs and expenses of collection, including the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, and any other amounts due to the Trustee under Section 7.07 hereof.
SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM.
The Trustee is authorized to file such proofs of claim and
other papers or documents as may be necessary or advisable in order to have the
claims of the Trustee (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel) and
the holders of the Notes allowed in any judicial proceedings relative to the
Obligors (or any other obligor upon the Notes), the Obligors' creditors or the
Obligor's property and shall be entitled and empowered to collect, receive and
distribute any money or other property payable or deliverable on any such claims
and any Custodian in any such judicial proceeding is hereby authorized by each
holder of a Note to make such payments to the Trustee, and in the event that the
Trustee shall consent to the making of such payments directly to the holders of
the Notes, to pay to the Trustee any amount due to it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, and any other amounts due the Trustee under Section 7.07 hereof. To
the extent that the payment of any such compensation, expenses, disbursements
and advances of the Trustee, its agents and counsel, and any other amounts due
the Trustee under Section 7.07 hereof out of the estate in any such proceeding,
shall be denied for any reason, payment of the same shall be secured by a Lien
on, and shall be paid out of, any and all distributions, dividends, money,
securities and other properties which the holders of the Notes may be entitled
to receive in such proceeding whether in liquidation or under any plan of
reorganization or arrangement or otherwise. Nothing contained herein shall be
deemed to authorize the Trustee to authorize or consent to or accept or adopt on
behalf of any holder of a Note any plan of reorganization, arrangement,
adjustment or composition affecting the Notes or the rights of any holder of a
Note thereof, or to authorize the Trustee to vote in respect of the claim of any
holder of a Note in any such proceeding.
SECTION 6.10. PRIORITIES.
If the Trustee collects any money pursuant to this Article 6,
it shall pay out the money in the following order:
First: to the Trustee, its agents and attorneys for amounts
due under Section 7.07 hereof, including payment of all compensation, expenses
and liabilities incurred, and all advances made, by the Trustee and the costs
and expenses of collection;
Second: (i) first to holders of Notes, for amounts due and
unpaid on such Notes for interest, ratably, without preference or priority of
any kind, according to the amounts due and payable on the Notes for interest,
and (ii) second, to the extent any other monies are available, to holders of
Notes for
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amounts due and unpaid on such Notes for principal and premium and Liquidated
Damages, if any, ratably, without preference or priority of any kind, according
to the amounts due and payable on the Notes for principal and premium and
Liquidated Damages, if any; and
Third: to the Obligors or to such party as a court of
competent jurisdiction shall direct.
The Trustee may fix a record date and payment date for any
such payment to holders of Notes.
SECTION 6.11. UNDERTAKING FOR COSTS.
In any suit for the enforcement of any right or remedy under
this Indenture or in any suit against the Trustee for any action taken or
omitted by it as a Trustee, a court in its discretion may require the filing by
any party litigant in the suit of an undertaking to pay the costs of the suit,
and the court in its discretion may assess reasonable costs, including
reasonable attorneys' fees, against any party litigant in the suit, having due
regard to the merits and good faith of the claims or defenses made by the party
litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a
holder of a Note pursuant to Section 6.07 hereof, or a suit by holders of more
than 10% in principal amount of the then outstanding Notes.
ARTICLE 7
TRUSTEE
SECTION 7.01. DUTIES OF TRUSTEE.
(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and shall use the same degree of care and skill in their exercise as
a prudent man would exercise or use under the circumstances in the conduct of
his own affairs.
(b) Except during the continuance of an Event of Default:
(i) the duties of the Trustee shall be determined solely by
the express provisions of this Indenture and the Trustee need perform
only those duties that are specifically set forth in this Indenture and
no others, and no implied covenants or obligations shall be read into
this Indenture against the Trustee, and
(ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture. However, the Trustee shall examine the certificates and
opinions to determine whether or not they conform to the requirements
of this Indenture.
(c) The Trustee may not be relieved from liabilities for its
own negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
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(i) this paragraph does not limit the effect of paragraph (b)
of this Section 7.01;
(ii) the Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer, unless it is proved that
the Trustee was negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 6.05 hereof.
(d) Whether or not therein expressly so provided, every
provision of this Indenture that in any way relates to the Trustee is subject to
paragraphs (a), (b), and (c) of this Section 7.01.
(e) No provision of this Indenture shall require the Trustee
to expend or risk its own funds or incur any liability. The Trustee shall be
under no obligation to exercise any of its rights and powers under this
Indenture at the request of any holders of Notes, including, without limitation,
the provisions of Section 6.05 hereof, unless such holders shall have provided
to the Trustee security and indemnity satisfactory to the Trustee against any
loss, liability or expense.
(f) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Obligors.
Money held in trust by the Trustee need not be segregated from other funds
except to the extent required by law.
(g) The Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order, bond,
debenture or other paper or documents, but the Trustee, in its discretion may
make such further inquiry or investigation into such facts or matters as it may
see fit, and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and premises
of the Obligors, personally or by agent or attorney.
SECTION 7.02. RIGHTS OF TRUSTEE.
(a) The Trustee may conclusively rely upon any document
believed by it to be genuine and to have been signed or presented by the proper
Person. The Trustee need not investigate any fact or matter stated in the
document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel or both. The Trustee
shall not be liable for any action it takes or omits to take in good faith in
reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may
consult with counsel and the advice of such counsel or any Opinion of Counsel
shall be full and complete authorization and protection from liability in
respect of any action taken, suffered or omitted by it hereunder in good faith
and in reliance thereon.
(c) The Trustee may act through its attorneys and agents and
shall not be responsible for the misconduct or negligence of any agent appointed
with due care.
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(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith which it believes to be authorized or within its
rights or powers conferred upon it by this Indenture.
(e) Unless otherwise specifically provided in this Indenture,
any demand, request, direction or notice from an Obligor shall be sufficient if
signed by an Officer of the Obligor. A permissive right granted to the Trustee
hereunder shall not be deemed an obligation to act.
(f) The Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture, at the request or
direction of any of the holders unless such holders shall have provided to the
Trustee reasonable security or indemnity against the costs, expenses and
liabilities that might be incurred by it in compliance with such request or
direction.
(g) The Trustee shall not be charged with knowledge of any
Default or Event of Default unless either (i) a Responsible Officer of the
Trustee shall have actual knowledge of such Default or Event of Default or (ii)
written notice of such Default or Event of Default shall have been given to the
Trustee by an Obligor or any Holder.
SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE.
The Trustee in its individual or any other capacity may become
the owner or pledgee of Notes and may otherwise deal with an Obligor or any
Affiliate of an Obligor with the same rights it would have if it were not
Trustee. However, in the event that the Trustee acquires any conflicting
interest, it must eliminate such conflict within 90 days, apply to the
Commission for permission to continue as Trustee or resign. Any Agent may do the
same with like rights and duties. The Trustee is also subject to Sections 7.10
and 7.11 hereof.
SECTION 7.04. TRUSTEE'S DISCLAIMER.
The Trustee shall not be responsible for and makes no
representation as to the validity or adequacy of this Indenture or the Notes, it
shall not be accountable for the Obligors' use of the proceeds from the Notes or
any money paid to the Obligors or upon the Obligors' direction under any
provision of this Indenture, it shall not be responsible for the use or
application of any money received by any Paying Agent other than the Trustee,
and it shall not be responsible for any statement or recital herein or any
statement in the Notes or any other document in connection with the sale of the
Notes or pursuant to this Indenture other than its certificate of
authentication.
SECTION 7.05. NOTICE OF DEFAULTS.
If a Default or Event of Default occurs and is continuing and
if it is known to a Responsible Officer of the Trustee, the Trustee shall mail
to holders of Notes a notice of the Default or Event of Default within 90 days
after it occurs. Except in the case of a Default or Event of Default in payment
of principal of, premium, if any, or interest on any Note, the Trustee may
withhold the notice if and so long as a
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committee of its Responsible Officers in good faith determines that withholding
the notice is in the interests of the holders of the Notes.
SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES.
Within 60 days after each May 15th beginning with the May 15th
following the date of this Indenture, the Trustee shall mail to the holders of
the Notes a brief report dated as of such reporting date that complies with TIA
ss. 313(a) (but if no event described in TIA ss. 313(a) has occurred within the
twelve months preceding the reporting date, no report need be transmitted). The
Trustee also shall comply with TIA ss. 313(b). The Trustee shall also transmit
by mail all reports as required by TIA ss. 313(c).
A copy of each report at the time of its mailing to the
holders of Notes shall be mailed to the Obligors and filed with the Commission
and each stock exchange on which the Notes are listed. The Obligors shall
promptly notify the Trustee when the Notes are listed on any stock exchange.
SECTION 7.07. COMPENSATION AND INDEMNITY.
The Obligors shall pay to the Trustee from time to time
reasonable compensation for its acceptance of this Indenture and services
hereunder. The Trustee's compensation shall not be limited by any law on
compensation of a trustee of an express trust. The Obligors shall reimburse the
Trustee promptly upon request for all reasonable disbursements, advances and
expenses incurred or made by it in addition to the compensation for its
services. Such expenses shall include the reasonable compensation, disbursements
and expenses of the Trustee's agents and counsel.
The Obligors shall indemnify the Trustee against any and all
losses, liabilities or expenses incurred by it arising out of or in connection
with the acceptance or administration of its duties under this Indenture, except
any such loss, liability or expense as may be attributable to the negligence or
bad faith of the Trustee. The Trustee shall notify the Obligors promptly of any
claim for which it may seek indemnity. Failure by the Trustee to so notify the
Obligors shall not relieve the Obligors of their obligations hereunder. The
Obligors shall defend the claim and the Trustee shall cooperate in the defense.
The Trustee, in its sole discretion, may elect to have separate counsel selected
by it and the Obligors shall pay the reasonable fees and expenses of such
counsel. The Obligors need not pay for any settlement made without their
consent, which consent shall not be unreasonably withheld.
The obligations of the Obligors under this Section 7.07 shall
be joint and several and shall survive the resignation or removal of the Trustee
and the satisfaction and discharge of this Indenture.
To secure the Obligors' payment obligations in this Section
7.07, the Trustee shall have a Lien prior to the Notes on all money or property
held or collected by the Trustee, except that held in trust to pay principal,
premium, if any, interest and Liquidated Damages, if any, on particular Notes.
Such Lien shall survive the resignation or removal of the Trustee and the
satisfaction and discharge of this Indenture.
When the Trustee incurs expenses or renders services after an
Event of Default specified in Section 6.01(g) or (h) hereof occurs, the expenses
and the compensation for the services (including the
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fees and expenses of its agents and counsel) are intended to constitute expenses
of administration under any Bankruptcy Law.
SECTION 7.08. REPLACEMENT OF TRUSTEE.
A resignation or removal of the Trustee and appointment of a
successor Trustee shall become effective only upon the successor Trustee's
acceptance of appointment as provided in this Section 7.08.
The Trustee may resign in writing at any time and be
discharged from the trust hereby created by so notifying the Obligors. The
holders of a majority in principal amount of the then outstanding Notes may
remove the Trustee by so notifying the Trustee and the Obligors in writing. The
Obligors may remove the Trustee if:
(a) the Trustee fails to comply with Section 7.10 hereof;
(b) the Trustee is adjudged a bankrupt or an insolvent or an
order for relief is entered with respect to the Trustee under any
Bankruptcy Law;
(c) a Custodian or public officer takes charge of the Trustee
or its property; or
(d) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in
the office of Trustee for any reason, the Obligors shall promptly appoint a
successor Trustee. Within one year after the successor Trustee takes office, the
holders of a majority in principal amount of the then outstanding Notes may
appoint a successor Trustee to replace the successor Trustee appointed by the
Obligors.
If a successor Trustee does not take office within 60 days
after the retiring Trustee resigns or is removed, the retiring Trustee, the
Obligors, or the holders of at least 10% in principal amount of the then
outstanding Notes may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
If the Trustee after written request by any holder of a Note
who has been a holder of a Note for at least six months fails to comply with
Section 7.10 hereof, such holder of a Note may petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a successor
Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Obligors. Thereupon, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to holders of the Notes. The retiring Trustee shall promptly transfer
all property held by it as Trustee to the successor Trustee, provided all sums
owing to the Trustee hereunder have been paid and subject to the Lien provided
for in Section 7.07 hereof. Notwithstanding replacement of the Trustee pursuant
to this Section 7.08, the Obligors' obligations under Section 7.07 hereof shall
continue for the benefit of the retiring Trustee.
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SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC.
If the Trustee consolidates, merges or converts into, or
transfers all or substantially all of its corporate trust business to, another
corporation, the successor corporation without any further act shall be the
successor Trustee.
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION.
There shall at all times be a Trustee hereunder which shall be
a corporation organized and doing business under the laws of the United States
of America or of any state thereof authorized under such laws to exercise
corporate trustee power, shall be subject to supervision or examination by
federal or state authority and shall have a combined capital and surplus of at
least $25.0 million as set forth in its most recent published annual report of
condition.
This Indenture shall always have a Trustee who satisfies the
requirements of TIA ss. 310(a)(1), (2) and (5). The Trustee is subject to TIA
ss. 310(b).
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST THE COMPANY.
The Trustee is subject to TIA ss. 311(a), excluding any
creditor relationship listed in TIA ss. 311(b). A Trustee who has resigned or
been removed shall be subject to TIA ss. 311(a) to the extent indicated therein.
ARTICLE 8
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
SECTION 8.01. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE.
The Company may, at the option of its Board of Directors
evidenced by a resolution set forth in an Officers' Certificate and at any time,
with respect to the Notes, elect to have either Section 8.02 or 8.03 hereof be
applied to all outstanding Notes upon compliance with the conditions set forth
below in this Article 8.
SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE.
Upon the Company's exercise under Section 8.01 hereof of the
option applicable to this Section 8.02, the Obligors shall be deemed to have
been discharged from their obligations with respect to all outstanding Notes on
the date the conditions set forth in Section 8.04 are satisfied (hereinafter,
"Legal Defeasance"). For this purpose, such Legal Defeasance means that the
Obligors shall be deemed to have paid and discharged the entire Indebtedness
represented by the outstanding Notes, which shall thereafter be deemed to be
"outstanding" only for the purposes of Section 8.05 hereof and the other
sections of this Indenture referred to in (a) and (b) below, and to have
satisfied all of its other obligations under such Notes
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and this Indenture (and the Trustee, on demand of and at the expense of the
Obligors, shall execute proper instruments acknowledging the same), except for
the following which shall survive until otherwise terminated or discharged
hereunder: (a) the rights of holders of outstanding Notes to receive from the
trust described below payments in respect of the principal of, premium, if any,
and interest on and Liquidated Damages with respect to such Notes when such
payments are due, or on the redemption date, as the case may be; (b) the
Obligors' obligations with respect to the Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust; (c) the rights, powers, trust, duties and immunities of the
Trustee, and the Obligors' obligations in connection therewith; and (d) the
Legal Defeasance provisions of this Indenture.
SECTION 8.03. COVENANT DEFEASANCE.
Upon the Company's exercise under Section 8.01 hereof of the
option applicable to this Section 8.03, the Obligors shall be released from
their obligations under the covenants contained in Sections 4.03, 4.04, 4.05,
4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.15, 4.16, 4.17, and 4.18 hereof and
Article 5 hereof with respect to the outstanding Notes on and after the date the
conditions set forth in Section 8.04 are satisfied (hereinafter, "Covenant
Defeasance"), and the Notes shall thereafter be deemed not "outstanding" for the
purposes of any direction, waiver, consent or declaration or act of holders (and
the consequences of any thereof) in connection with such covenants, but shall
continue to be deemed "outstanding" for all other purposes hereunder (it being
understood that such Notes shall not be deemed outstanding for accounting
purposes). For this purpose, such Covenant Defeasance means that, with respect
to the outstanding Notes, the Obligors may omit to comply with and shall have no
liability in respect of any term, condition or limitation set forth in any such
covenant, whether directly or indirectly, by reason of any reference elsewhere
herein to any such covenant or by reason of any reference in any such covenant
to any other provision herein or in any other document and such omission to
comply shall not constitute a Default or an Event of Default under Section 6.01
hereof but, except as specified above, the remainder of this Indenture and such
Notes shall be unaffected thereby. In addition, upon the Company's exercise
under Section 8.01 hereof of the option applicable to this Section 8.03, subject
to the satisfaction of the conditions set forth in Section 8.04 hereof, Sections
6.01(c) through 6.01(f) hereof shall not constitute Events of Default.
SECTION 8.04. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE.
The following shall be the conditions to the application of either
Section 8.02 or Section 8.03 hereof to the outstanding Notes:
(a) The Obligors shall irrevocably have deposited or caused to
be deposited with the Trustee (or another trustee satisfying the
requirements of Section 7.10 hereof who shall agree to comply with the
provisions of this Article 8 applicable to it), in trust, for purpose
of making the following payments, specifically pledged as security for,
and dedicated solely to, the benefit of the holders of the Notes, (i)
cash in U.S. dollars, (ii) non-callable Government Securities, or (iii)
a combination thereof, in such amounts as will be sufficient, in the
opinion of a nationally recognized firm of independent public
accountants selected by the Obligors, to pay the principal of, premium
and Liquidated Damages, if any, and interest on the outstanding Notes,
on the stated maturity or
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on the applicable optional redemption date, as the case may be, of such
principal or installment of principal of, premium, if any, or interest
on or Liquidated Damages with respect to the outstanding Notes;
(b) In the case of Legal Defeasance, the Obligors shall have
delivered to the Trustee an Opinion of Counsel in the United States
reasonably acceptable to the Trustee confirming that (i) the Obligors
have received from, or there has been published by, the Internal
Revenue Service a ruling or (ii) since the Issue Date, there has been a
change in the applicable federal income tax law, in either case to the
effect that, and based thereon such opinion of counsel shall confirm
that, the holders of the outstanding Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred;
(c) In the case of Covenant Defeasance, the Obligors shall
have delivered to the Trustee an Opinion of Counsel in the United
States reasonably acceptable to the Trustee confirming that the holders
of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Covenant Defeasance and
will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such
Covenant Defeasance had not occurred;
(d) No Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event
of Default resulting from the borrowing of funds to be applied to such
deposit) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day
after the date of deposit;
(e) Such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under any
material agreement or instrument (other than this Indenture) to which
the Company or any of its Subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound;
(f) The Obligors shall have delivered to the Trustee an
Opinion of Counsel to the effect that after the 91st day (or such other
applicable date) following the deposit, the trust funds will not be
subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally;
(g) Each Obligor shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the
Obligors with the intent of preferring the holders of Notes over the
other creditors of either Obligor with the intent of defeating,
hindering, delaying or defrauding creditors of either Obligor or
others; and
(h) Each Obligor shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent provided for relating to the Legal Defeasance or
the Covenant Defeasance have been complied with.
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SECTION 8.05. DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN
TRUST; OTHER MISCELLANEOUS PROVISIONS.
Subject to Section 8.06 hereof, all money and Government Securities
(including the proceeds thereof) deposited with the Trustee (or other qualifying
trustee, collectively for purposes of this Section 8.05, the "Trustee") pursuant
to Section 8.04 hereof in respect of the outstanding Notes shall be held in
trust and applied by the Trustee, in accordance with the provisions of such
Notes and this Indenture, to the payment, either directly or through any Paying
Agent (including an Obligor acting as Paying Agent) as the Trustee may
determine, to the holders of such Notes of all sums due and to become due
thereon in respect of principal, premium, if any, and interest, but such money
and Government Securities (including any proceeds thereof) need not be
segregated from other funds except to the extent required by law.
The Obligors shall pay and indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against the cash or Government Securities
deposited pursuant to Section 8.04 hereof or the principal and interest received
in respect thereof other than any such tax, fee or other charge which by law is
for the account of the holders of the outstanding Notes.
Anything in this Article 8 to the contrary notwithstanding, the
Trustee shall deliver or pay to the Obligors from time to time upon the request
of the Obligors any money or Government Securities held by it as provided in
Section 8.04 hereof which, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee (which may be the opinion delivered under Section
8.04(a) hereof), are in excess of the amount thereof which would then be
required to be deposited to effect an equivalent Legal Defeasance or Covenant
Defeasance.
SECTION 8.06. REPAYMENT TO THE OBLIGORS
Any money deposited with the Trustee or any Paying Agent, or then
held by the Obligors, in trust for the payment of the principal of, premium, or
interest on any Note and remaining unclaimed for two years after such principal,
and premium, if any, or interest has become due and payable shall be paid to the
Obligors on its written request or (if then held by the Obligors) shall be
discharged from such trust; and the holder of such Note shall thereafter, as a
creditor, look only to the Obligors for payment thereof, and all liability of
the Trustee or such Paying Agent with respect to such trust money, and all
liability of the Obligors as trustee thereof, shall thereupon cease; provided,
however, that the Trustee or such Paying Agent, before being required to make
any such repayment, may at the expense of the Obligors cause to be published
once, in the New York Times and The Wall Street Journal (national edition),
notice that such money remains unclaimed and that, after a date specified
therein, which shall not be less than 30 days from the date of such notification
or publication, any unclaimed balance of such money then remaining will be
repaid to the Obligors.
SECTION 8.07. REINSTATEMENT.
If the Trustee or Paying Agent is unable to apply any United States
Dollars or Government Securities in accordance with Section 8.02 or 8.03 hereof,
as the case may be, by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
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application, then the Obligors' obligations under this Indenture and the Notes
shall be revived and reinstated as though no deposit had occurred pursuant to
Section 8.02 or 8.03 hereof until such time as the Trustee or Paying Agent is
permitted to apply all such money in accordance with Section 8.02 or 8.03
hereof, as the case may be; provided, however, that, if the Obligor makes any
payment of principal of, premium, if any, or interest on any Note following the
reinstatement of its obligations, the Obligor shall be subrogated to the rights
of the holders of such Notes to receive such payment from the money held by the
Trustee or Paying Agent.
ARTICLE 9
AMENDMENT, SUPPLEMENT AND WAIVER
SECTION 9.01. WITHOUT CONSENT OF HOLDERS OF NOTES.
Notwithstanding Section 9.02 hereof, the Obligors and the Trustee may
amend or supplement this Indenture or the Notes without the consent of any
holder of Notes:
(a) to cure any ambiguity, defect or inconsistency;
(b) to provide for uncertificated Notes in addition to or in place
of certificated Notes;
(c) to provide for the assumption of an Obligors' obligations to
holders of the Notes in the case of a merger or consolidation;
(d) to make any change that would provide any additional rights or
benefits to the holders of the Notes or that does not, in the
opinion of the Board of Directors of the Company, adversely
affect the legal rights under this Indenture of any such holder;
or
(e) to comply with requirements of the Commission in order to effect
or maintain the qualification of this Indenture under the Trust
Indenture Act.
Upon the request of the Obligors accompanied by a resolution of the
Board of Directors of each Obligor authorizing the execution of any such amended
or supplemental Indenture, and upon receipt by the Trustee of the documents
described in Section 9.06 hereof, the Trustee shall join with the Obligors in
the execution of any amended or supplemental Indenture authorized or permitted
by the terms of this Indenture and to make any further appropriate agreements
and stipulations which may be therein contained, but the Trustee shall not be
obligated to enter into such amended or supplemental Indenture which affects its
own rights, duties or immunities under this Indenture or otherwise.
SECTION 9.02. WITH CONSENT OF HOLDERS OF NOTES.
The Obligors and the Trustee may amend or supplement this Indenture
or the Notes or any amended or supplemental Indenture with the written consent
of the holders of at least a majority in aggregate principal amount of the Notes
then outstanding (including consents obtained in connection with a tender offer
or exchange offer for the Notes), and any existing Default and its consequences
or compliance with any provision of this Indenture or the Notes may be waived
with the consent of the holders
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of a majority in principal amount of the then outstanding Notes (including
consents obtained in connection with a tender offer or exchange offer for the
Notes).
Upon the request of the Obligors accompanied by a resolution of the
Board of Directors of each Obligors authorizing the execution of any such
amended or supplemental Indenture, and upon the filing with the Trustee of
evidence satisfactory to the Trustee of the consent of the holders of Notes as
aforesaid, and upon receipt by the Trustee of the documents described in Section
9.06 hereof, the Trustee shall join with the Obligors in the execution of such
amended or supplemental Indenture unless such amended or supplemental Indenture
affects the Trustee's own rights, duties or immunities under this Indenture or
otherwise, in which case the Trustee may in its discretion, but shall not be
obligated to, enter into such amended or supplemental Indenture.
It shall not be necessary for the consent of the holders of Notes
under this Section 9.02 to approve the particular form of any proposed amendment
or waiver, but it shall be sufficient if such consent approves the substance
thereof.
After an amendment, supplement or waiver under this Section 9.02
becomes effective, the Obligors shall mail to the holders of Notes affected
thereby a notice briefly describing the amendment, supplement or waiver. Any
failure of the Obligors to mail such notice, or any defect therein, shall not,
however, in any way impair or affect the validity of any such amended or
supplemental Indenture or waiver. Subject to Sections 6.04 and 6.07 hereof, the
holders of a majority in aggregate principal amount of the Notes then
outstanding may waive compliance in a particular instance by the Obligors with
any provision of this Indenture or the Notes. However, without the consent of
each holder affected, an amendment or waiver may not (with respect to any Note
held by a non-consenting holder of Notes):
(i) reduce the principal amount of Notes whose holders must
consent to an amendment, supplement or waiver;
(ii) reduce the principal of or change the fixed maturity of any
Note or alter the provisions with respect to the redemption of
the Notes (other than Sections 3.09 and 4.15 hereof);
(iii) reduce the rate of or change the time for payment of interest
on any Notes;
(iv) waive a Default or Event of Default in the payment of
principal of or premium, if any, or interest on the Notes
(except a rescission of acceleration of the Notes by the
holders of at least a majority in aggregate principal amount
of the Notes and a waiver of the payment default that resulted
from such acceleration);
(v) make any Note payable in money other than that stated in the
Notes;
(vi) make any change in the provisions of this Indenture relating
to waivers of past Defaults or the rights of holders of Notes
to receive payments of principal of, premium, if any, or
interest on the Notes;
(vii) waive a redemption payment with respect to any Note (other
than a payment required by Sections 3.09 or 4.15 hereof);
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(viii) make any change in the foregoing amendment and waiver
provisions.
Notwithstanding the foregoing, at any time prior to the occurrence of a Change
of Control or the accumulation by the Company of Excess Proceeds in excess of
$10.0 million, the covenants described under Sections 3.09 and 4.15 hereof, as
applicable, may be altered and any payment which may be required to be paid
pursuant to these covenants may be waived by the holders of at least a majority
of the principal amount of the Notes then outstanding, including consents
obtained in connection with a tender offer or exchange offer for Notes.
SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT.
Every amendment or supplement to this Indenture or the Notes shall be
set forth in a amended or supplemental Indenture that complies with the TIA as
then in effect.
SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS.
Until an amendment, supplement or waiver becomes effective, a consent
to it by a holder of a Note is a continuing consent by the holder of a Note and
every subsequent holder of a Note or portion of a Note that evidences the same
debt as the consenting holder's Note, even if notation of the consent is not
made on any Note. However, any such holder of a Note or subsequent holder of a
Note may revoke the consent as to its Note if the Trustee receives written
notice of revocation before the date the waiver, supplement or amendment becomes
effective. An amendment, supplement or waiver becomes effective in accordance
with its terms and thereafter binds every holder of a Note.
The Obligors may fix a record date for determining which holders of
the Notes must consent to such amendment, supplement or waiver. If the Obligors
fix a record date, the record date shall be fixed at (i) the later of 30 days
prior to the first solicitation of such consent or the date of the most recent
list of holders of Notes furnished to the Trustee prior to such solicitation
pursuant to Section 2.05 hereof or (ii) such other date as the Obligors shall
designate.
SECTION 9.05. NOTATION ON OR EXCHANGE OF NOTES.
The Trustee may place an appropriate notation about an amendment,
supplement or waiver on any Note thereafter authenticated. The Obligors in
exchange for all Notes may issue and the Trustee shall authenticate new Notes
that reflect the amendment, supplement or waiver.
Failure to make the appropriate notation or issue a new Note shall
not affect the validity and effect of such amendment, supplement or waiver.
SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC.
The Trustee shall sign any amended or supplemental Indenture
authorized pursuant to this Article 9 if the amendment or supplement does not
adversely affect the rights, duties, liabilities or immunities of
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the Trustee. An Obligor may not sign an amendment or supplemental Indenture
until its Board of Directors approves it. In signing or refusing to sign any
amendment or supplemental indenture, the Trustee shall be entitled to receive
and (subject to Section 7.01 hereof) shall be fully protected in relying upon,
in addition to documents required by Section 10.04 hereof, an Officers'
Certificate and an Opinion of Counsel as conclusive evidence that such amendment
or supplemental indenture is authorized or permitted by this Indenture, that it
is not inconsistent herewith, and that it will be valid and binding upon the
Obligors in accordance with its terms.
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ARTICLE 10
MISCELLANEOUS
SECTION 10.01. TRUST INDENTURE ACT CONTROLS.
If any provision of this Indenture limits, qualifies or conflicts
with the duties imposed by TIA ss. 318(c), the imposed duties shall control.
SECTION 10.02. NOTICES.
Any notice or communication by any Obligors or the Trustee to the
other is duly given if in writing and delivered in person or mailed by first
class mail (registered or certified, return receipt requested), telex,
telecopier or overnight air courier guaranteeing next day delivery, to the
other's address:
If to an Obligor:
MGC Communications, Inc.
Mpower Holding Corporation
Suite 202
171 Sully's Trail
Pittsford, New York 14534
Telecopier No.: (716) 218-6550
Attention: General Counsel
If to the Trustee:
HSBC Bank USA
140 Broadway
12th Floor
New York, New York 10005
Telephone No.: (212) 658-6433
Telecopier No.: (212) 658-6425
Attention: Issuer Services
An Obligor or the Trustee, by notice to the other may designate
additional or different addresses for subsequent notices or communications.
All notices and communications (other than those sent to holders of
Notes) shall be deemed to have been duly given: at the time delivered by hand,
if personally delivered; five Business Days after being deposited in the mail,
postage prepaid, if mailed; when answered back, if telexed; when receipt
acknowledged, if telecopied; and the next Business Day after timely delivery to
the courier, if sent by over night air courier guaranteeing next day delivery.
Any notice or communication to a holder of a Note shall be mailed by
first class mail to its address shown on the register kept by the Registrar. Any
notice or communication shall also be so mailed
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to any Person described in TIA ss. 313(c), to the extent required by the TIA.
Failure to mail a notice or communication to a holder of a Note or any defect in
it shall not affect its sufficiency with respect to other holders of Notes.
If a notice or communication is mailed in the manner provided above
within the time prescribed, it is duly given, whether or not the addressee
receives it.
If an Obligor mails a notice or communication to holders of Notes, it
shall mail a copy to the Trustee and each Agent at the same time.
SECTION 10.03. COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES.
Holders of the Notes may communicate pursuant to TIA ss. 312(b) with
other holders of Notes with respect to their rights under this Indenture or the
Notes. The Obligors, the Trustee, the Registrar and anyone else shall have the
protection of TIA ss. 312(c).
SECTION 10.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
Upon any request or application by the Obligors to the Trustee to
take any action under this Indenture, each Obligor shall furnish to the Trustee:
(a) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set forth
in Section 10.05 hereof) stating that, in the opinion of the signers, all
conditions precedent and covenants, if any, provided for in this Indenture
relating to the proposed action have been satisfied; and
(b) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set forth
in Section 10.05 hereof) stating that, in the opinion of such counsel, all
such conditions precedent and covenants have been satisfied.
SECTION 10.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than a certificate
provided pursuant to TIA ss. 314(a)(4)) shall include:
(a) a statement that the Person making such certificate or opinion
has read such covenant or condition;
(b) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(c) a statement that, in the opinion of such Person, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
satisfied; and
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(d) a statement as to whether or not, in the opinion of such Person,
such condition or covenant has been satisfied.
SECTION 10.06. RULES BY TRUSTEE.
The Trustee may make reasonable rules for action by or at a meeting
of holders of Notes. The Registrar or Paying Agent may make reasonable rules and
set reasonable requirements for its functions.
SECTION 10.07. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND
STOCKHOLDERS.
No director, officer, employee, incorporator or stockholder of any
Obligor, as such, shall have any liability for any obligations of the Obligors
under the Notes or this Indenture or for any claim based on, in respect of, or
by reason of such obligations or their creation. Each holder of the Notes by
accepting a Note waives and releases all such liability. The waiver and release
are part of the consideration for the issuance of the Notes. Such waiver may not
be effective to waive liabilities under the federal securities laws and it is
the view of the Commission that such a waiver is against public policy.
SECTION 10.08. GOVERNING LAW.
The internal law of the State of New York shall govern and be used to
construe this Indenture and the Notes.
SECTION 10.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.
This Indenture may not be used to interpret another indenture, loan
or debt agreement of the Company or its Subsidiaries. Any such indenture, loan
or debt agreement may not be used to interpret this Indenture.
SECTION 10.10. SUCCESSORS.
All agreements of the Obligors in this Indenture and the Notes shall
bind their successors. All agreements of the Trustee in this Indenture shall
bind its successor.
SECTION 10.11. SEVERABILITY.
In case any provision in this Indenture or in the Notes shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 10.12. COUNTERPART ORIGINALS.
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The parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together represent the same
agreement.
SECTION 10.13. TABLE OF CONTENTS, HEADINGS, ETC.
The Table of Contents, Cross-Reference Table and Headings of the
articles and sections of this Indenture have been inserted for convenience of
reference only, are not to be considered a part of this Indenture and shall in
no way modify or restrict any of the terms or provisions hereof.
[Signatures on following page]
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SIGNATURES
MGC COMMUNICATIONS, INC.
By:
-------------------------------------
Name:
Title:
MPOWER HOLDING CORPORATION
By:
-------------------------------------
Name:
Title:
HSBC BANK USA
Trustee
By:
-------------------------------------
Name:
Title:
<PAGE>
EXHIBIT A
(Face of Note)
13% Senior Note due 2010
No. $_______________
CUSIP No.
MGC Communications, Inc.
and
Mpower Holding Corporation
jointly and severally, promise to pay to Cede & Co.
or its registered assigns,
the principal sum of $____________
on April 1, 2010.
Interest Payment Dates: April 1 and October 1, commencing October 1, 2000.
Record Dates: March 15 and September 15 (whether or not a Business Day).
Dated: ____________, ____ MGC COMMUNICATIONS, INC.
By:
---------------------------------
Title:
By:
---------------------------------
Title:
(SEAL)
Dated: ____________, ____ MPOWER HOLDING CORPORATION
By:
---------------------------------
Title:
By:
---------------------------------
Title:
(SEAL)
MGC COMMUNICATIONS, INC. MAY BE RELEASED OF ALL ITS OBLIGATIONS UNDER THIS
NOTE AND THE INDENTURE PURSUANT TO SECTION 5.03 OF THE INDENTURE.
A-1
<PAGE>
Trustee's Certification of Authentication
This is one of the Notes referred to in the within-mentioned Indenture:
HSBC BANK USA,
as Trustee
By:
------------------------------------
(Authorized Signatory)
Additional provisions of this Note are set forth on the other
side of this Note.
A-2
<PAGE>
(Back of Note)
13% Senior Note due 2010
THIS GLOBAL SECURITY IS HELD BY THE DEPOSITARY (AS DEFINED IN THE
INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE
BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY
CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY
BE REQUIRED PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS GLOBAL SECURITY
MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE
INDENTURE, (III) THIS GLOBAL SECURITY MAY BE DELIVERED TO THE TRUSTEE FOR
CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL
SECURITY MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN
CONSENT OF THE COMPANY.1
"THE SECURITY (OR ITS PREDECESSORS) EVIDENCED HEREBY HAS NOT
BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933
(THE "SECURITIES ACT"), AND THE SECURITY EVIDENCED HEREBY OR
ANY INTEREST OR PARTICIPATION HEREIN MAY NOT BE OFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH
TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.
THE HOLDER OF THE SECURITY BY ITS ACCEPTANCE HEREOF AGREES (A)
TO OFFER, SELL, PLEDGE OR OTHERWISE TRANSFER THIS SECURITY
ONLY (1) TO THE COMPANY, (2) PURSUANT TO A REGISTRATION
STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE
SECURITIES ACT, (3) TO A PERSON IT REASONABLY BELIEVES IS A
"QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (4)
PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR
OUTSIDE THE UNITED STATES IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT, (5) TO AN
INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE
501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE
SECURITIES ACT OR (6) PURSUANT TO ANY OTHER AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE
SECURITIES ACT (AND IN THE CASE OF A TRANSFER PURSUANT TO
CLAUSE (5) OR (6), BASED ON AN OPINION OF COUNSEL IF THE
COMPANY SO REQUESTS), SUBJECT IN EACH OF THE FOREGOING CASES
TO APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED
STATES OR ANY OTHER APPLICABLE
- --------
1 Legend to be included only on Global Securities.
A-3
<PAGE>
JURISDICTION AND (B) THAT IT WILL, AND EACH SUBSEQUENT HOLDER
IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE SECURITY
EVIDENCED HEREBY OF THE RESALE RESTRICTIONS SET FORTH IN (A)
ABOVE."
Capitalized terms used herein have the meanings assigned to them in
the Indenture (as defined below) unless otherwise indicated.
1. Interest. MGC Communications, Inc., a Nevada corporation ("MGC"),
and Mpower Holding Corporation, a Delaware corporation ("Mpower"), promise to
pay interest on the principal amount of this Note at the rate and in the manner
specified below. Interest will accrue at the rate of 13% per annum and will be
payable semi-annually, in arrears, on April 1 and October 1 of each year (each
an "Interest Payment Date"), commencing on October 1, 2000, or if any such day
is not a Business Day on the next succeeding Business Day to holders of record
of the Notes at the close of business on the immediately preceding March 15 and
September 15, whether or not a Business Day. Interest on the Notes will accrue
from the most recent date to which interest has been paid or, if no interest has
been paid, from the Issue Date. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months. To the extent lawful, the
Obligors shall pay interest on overdue principal at the then applicable interest
rate on the Notes; they shall pay interest on overdue installments of interest
(without regard to any applicable grace periods) at the same rate to the extent
lawful.
2. Method of Payment. The Obligors will pay interest on the Notes
(except defaulted interest) to the Persons who are registered holders of Notes
at the close of business on the record date next preceding the Interest Payment
Date, even if such Notes are canceled after such record date and on or before
such Interest Payment Date. Principal, premium, Liquidated Damages, if any, and
interest on the Notes will be payable by wire transfer of immediately available
funds to the account(s) specified by the holder thereof, or, if no such
account(s) are specified, by mailing a check to each such holder's registered
address.
3. Paying Agent and Registrar. Initially, the Trustee will act as
Paying Agent and Registrar. The Obligors may change any Paying Agent, Registrar
or co-registrar without prior notice to any holder of a Note. The Obligors may
act in any such capacity.
4. Indenture. The Obligors issued the Notes under an Indenture, dated
as of March 24, 2000 (the "Indenture"), between the MGC, Mpower and the Trustee.
The terms of the Notes include those stated in the Indenture and those made part
of the Indenture by reference to the Trust Indenture Act of 1939, as amended (15
U.S. Code ss.ss. 77aaa-77bbbb), as in effect on the date of the Indenture. The
Notes are subject to all such terms, and holders of Notes are referred to the
Indenture and such act for a statement of such terms. The terms of the Indenture
shall govern any inconsistencies between the Indenture and the Notes.
5. Release. MGC may, upon compliance with the conditions set forth in
the Indenture, elect to have all of its obligations under the Indenture and the
Notes automatically released and discharged without any action required on the
part of the holders of the Notes, at any time when (i) less than 33 1/3 % of the
aggregate principal amount of the Existing Notes originally issued are
outstanding and (ii) Mpower owns 100% of the issued and outstanding Equity
Interests of MGC and owns any outstanding debt securities convertible into or
exchangeable for Equity Interests of MGC.
A-4
<PAGE>
6. Optional Redemption. The Notes will not be redeemable at the
Company's option prior to April 1, 2005. Thereafter, the Notes will be subject
to redemption at the option of the Company, in whole or in part at the
redemption prices (expressed as percentages of principal amount) set forth below
plus accrued and unpaid interest and Liquidated Damages, if any, thereon to the
applicable redemption date, if redeemed during the twelve-month period beginning
on April 1 of the years indicated below:
Year Percentage
---- ----------
2005........................................ 106.500%
2006 ....................................... 104.330%
2007 ....................................... 102.166%
2008 and thereafter......................... 100.000%
Notwithstanding the provisions of Section 3.07(a) of the Indenture, in
the event of the sale by the Company prior to April 1, 2003 of its Capital Stock
(other than Disqualified Stock) in one or more Equity Offerings, up to a maximum
of 35% of the aggregate principal amount of the Notes originally issued,
including any Notes issued after the Issue Date under the Indenture, will, at
the option of the Company, be redeemable from the net cash proceeds of one or
more Equity Offerings (but only to the extent the proceeds of such Equity
Offering consist of cash or readily marketable cash equivalents) at a redemption
price equal to 113% of the principal amount thereof plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the redemption date,
provided that at least 65% of the aggregate principal amount of the Notes
originally issued, including any Notes issued after the Issue Date under the
Indenture, remain outstanding immediately after the occurrence of such
redemption and that such redemption occurs within 90 days of the date of the
closing of such Equity Offering.
7. Mandatory Redemption. Except as set forth in Sections 3.09 and
4.15 of the Indenture, the Company will not be required to make mandatory
redemption or sinking fund payments with respect to the Notes.
8. Repurchase at Option of holder. (a) Upon the occurrence of a
Change of Control, the Company shall be required to make an offer to repurchase
on the Change of Control Payment Date all or any part (equal to $1,000 or an
integral multiple thereof) of the outstanding Notes at a purchase price equal to
101% of the aggregate principal amount thereof plus accrued and unpaid interest,
and Liquidated Damages, if any, thereon to the Change of Control Payment Date.
Holders of Notes that are subject to an offer to purchase will receive a Change
of Control Offer from the Company prior to any related Change of Control Payment
Date and may elect to have such Notes purchased by completing the form entitled
"Option of Holder to Elect Purchase" appearing below.
(b) The Company shall be required when the cumulative amount of
Excess Proceeds from Asset Sales exceeds $10.0 million to offer to purchase the
maximum principal amount of Notes and Pari Passu Notes that may be purchased out
of the Excess Proceeds, at an offer price in cash in an amount equal to 100% of
the outstanding principal amount of the Notes and 100% of the accreted value or
100% of the outstanding principal amount, as applicable, of the Pari Passu
Notes, plus accrued and unpaid interest and Liquidated Damages thereon, if any,
to the date fixed for the closing of such offer, in accordance with the
procedures set forth in Section 3.09 of the Indenture. If the aggregate
principal amount of Notes and the accreted value and/or aggregate principal
amount, as the case may be, of the Pari Passu Notes surrendered by holders
thereof exceeds the amount of Excess Proceeds, the Trustee shall select the
Notes to be purchased on a pro rata basis based upon their principal amount or
accreted value, as applicable (with such adjustments as may be deemed
appropriate by the Company so that only Notes in denominations of $1,000, or
integral multiples thereof shall be purchased). Holders of Notes that are the
subject of an offer to
A-5
<PAGE>
purchase will receive an Excess Proceeds Offer from the Company prior to any
related purchase date and may elect to have such Notes purchased by completing
the form entitled "Option of Holder to Elect Purchase" appearing below.
9. Notice of Redemption. Notice of redemption shall be mailed by
first class mail at least 30 days but not more than 60 days before the
redemption date to each holder of Notes to be redeemed at its registered
address. Notes may be redeemed in part but only in whole multiples of $1,000,
unless all of the Notes held by a holder of Notes are to be redeemed. If any
Note is to be redeemed in part only, the notice of redemption that relates to
such Note shall state the portion of the principal amount to be redeemed. On and
after the redemption date, interest ceases to accrue on Notes or portions of
them called for redemption.
10. Denominations, Transfer, Exchange. The Notes are in registered
form without coupons in denominations of $1,000 and integral multiples of
$1,000. The transfer of Notes may be registered and Notes may be exchanged as
provided in the Indenture. The Registrar and the Trustee may require a holder of
a Note, among other things, to furnish appropriate endorsements and transfer
documents and the Obligors may require a holder of a Note to pay any taxes and
fees required by law or permitted by the Indenture. Neither the Obligors nor the
Registrar need exchange or register the transfer of any Note or portion of a
Note selected for redemption. Also, neither the Obligors nor the Registrar need
exchange or register the transfer of any Notes for a period of 15 days before a
selection of Notes to be redeemed.
11. Persons Deemed Owners. Prior to due presentment to the Trustee
for registration of the transfer of this Note, the Trustee, any Agent and the
Obligors shall deem and treat the Person in whose name this Note is registered
as its absolute owner for the purpose of receiving payment of principal of,
premium, Liquidated Damages, if any, and interest on this Note and for all other
purposes whatsoever, whether or not this Note is overdue, and neither the
Trustee, any Agent nor the Obligors shall be affected by notice to the contrary.
The registered holder of a Note shall be treated as its owner for all purposes.
12. Amendments, Supplement and Waivers. Subject to certain
exceptions, the Indenture or the Notes may be amended or supplemented with the
consent of the holders of at least a majority in principal amount of the Notes
then outstanding (including consents obtained in connection with a tender offer
or exchange offer for Notes), and any existing default or compliance with any
provision of the Indenture or the Notes may be waived with the consent of the
holders of at least a majority in the principal amount of the then outstanding
Notes (including consents obtained in connection with a tender offer or exchange
offer for Notes). Without the consent of any holder of a Note, the Indenture or
the Notes may be amended or supplemented to cure any ambiguity, defect or
inconsistency; to provide for uncertificated Notes in addition to or in place of
certificated Notes; to provide for the assumption of an Obligor's obligations to
holders of the Notes in case of a merger or consolidation; to make any change
that would provide any additional rights or benefits to the holders of the Notes
or that does not, in the opinion of the Board of Directors of the Company,
adversely affect the legal rights under the Indenture of any such holder; or to
comply with the requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the Trust Indenture Act. However,
without the consent of each holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting holder of Notes) reduce the
principal amount of Notes whose holders must consent to an amendment, supplement
or waiver; reduce the principal of or change the fixed maturity of any Note or
alter the provisions with respect to the redemption of the Notes; reduce the
rate of or change the time for payment of interest on any Notes; waive a Default
or Event of Default in the payment of principal of or premium, if any, or
interest on the Notes (except a rescission of acceleration of the Notes by the
holders of at least a majority in aggregate principal amount of the Notes and a
waiver of the payment default that resulted from such acceleration); make any
Note payable in money
A-6
<PAGE>
other than that stated in the Notes; make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of holders of Notes
to receive payments of principal of, premium, if any, or interest on the Notes;
waive a redemption payment with respect to any Note; make any change in the
foregoing amendment and waiver provisions. Notwithstanding the foregoing, at any
time prior to the occurrence of a Change of Control or the accumulation by the
Company of Excess Proceeds in excess of $10.0 million, the covenants described
under Sections 3.09 and 4.15 hereof, as applicable, may be altered and any
payment which may be required to be paid pursuant to these covenants may be
waived by the holders of at least a majority of the principal amount of the
Notes then outstanding, including consents obtained in connection with a tender
offer or exchange offer for Notes.
13. Defaults and Remedies. Events of Default include: default for 30
days in the payment when due of interest on or Liquidated Damages, if any, with
respect to the Notes; default in payment when due of principal or premium, if
any, on the Notes at maturity, upon redemption or otherwise; failure by the
Company to perform or comply with the provisions described under Sections 4.07,
4.09, 4.10, 4.15 or 5.01 of the Indenture; failure by any Obligor for 30 days
after notice from the Trustee or the holders of at least 25% of the principal
amount of the Notes then outstanding to comply with its other agreements in the
Indenture or the Notes; default under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any of its
Restricted Subsidiaries), whether such Indebtedness or Guarantee now exists, or
is created after the Issue Date, which default (x) is caused by a Payment
Default, and the principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness of the Company or any
Significant Subsidiary under which there has been a Payment Default or the
maturity of which has been accelerated as provided in clause (y), aggregates
$5.0 million or more or (y) results in the acceleration (which acceleration has
not been rescinded) of such Indebtedness prior to its express maturity and the
principal amount of any such Indebtedness, together with the principal amount of
any other such Indebtedness under which there has been a Payment Default or the
maturity of which has been so accelerated, aggregates $5.0 million or more;
failure by the Company or any of its Significant Subsidiaries to pay final
judgments (other than any judgment as to which a reputable insurance company has
accepted full liability in writing) aggregating in excess of $5.0 million which
judgments are not paid, discharged or stayed within 45 days after their entry;
certain events of bankruptcy or insolvency with respect to the Company or any of
its Significant Subsidiaries. If any Event of Default occurs and is continuing,
the Trustee or the holders of at least 25% in principal amount of the then
outstanding Notes may declare all the Notes to be due and payable immediately.
Upon such declaration, the principal of, premium, if any, and accrued and unpaid
interest and Liquidated Damages, if any, on the Notes shall be due and payable
immediately. Notwithstanding the foregoing, in the case of an Event of Default
arising from certain events of bankruptcy or insolvency with respect to the
Company or any of its Significant Subsidiaries, the foregoing amount shall ipso
facto become due and payable without further action or notice. Holders of the
Notes may not enforce the Indenture or the Notes except as provided in the
Indenture. The holders of a majority in aggregate principal amount of the Notes
then outstanding, by notice to the Trustee, may on behalf of the holders of all
of the Notes, waive any existing Default or Event of Default and its
consequences under the Indenture, except a continuing Default or Event of
Default in the payment of interest or Liquidated Damages or premium on, or the
principal of, the Notes.
14. Trustee Dealings with the Company. The Trustee under the
Indenture, in its individual or any other capacity, may make loans to, accept
deposits from, and perform services for an Obligor or its Affiliates, and may
otherwise deal with an Obligor or its Affiliates, as if it were not Trustee;
however, if the Trustee acquires any conflicting interest, it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
as Trustee or resign.
A-7
<PAGE>
15. No Personal Liabilities of Directors, Officers, Employees and
Stockholders. No director, officer, employee, incorporator or stockholder of any
Obligor, as such, shall have any liability for any obligations of the Obligors
under the Notes or the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each holder of the Notes by
accepting a Note waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the Notes.
16. Authentication. This Note shall not be valid until authenticated
by the manual signature of the Trustee or an authenticating agent.
17. Abbreviations. Customary abbreviations may be used in the name of
a holder of a Note or an assignee, such as: TEN COM (= tenants in common), TEN
ENT (= tenants by the entireties), JT TEN (= joint tenants with right of
survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (=
Uniform Gifts to Minors Act).
18. Additional Rights of Holders of Transfer Restricted Securities.
In addition to the rights provided to holders of Notes under the Indenture,
holders of Transfer Restricted Securities shall have all the rights set forth in
the Registration Rights Agreement.
19. CUSIP Numbers. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Obligors have
caused CUSIP numbers to be printed on the Notes and have directed the Trustee to
use CUSIP numbers in notices of redemption or exchange as a convenience to
holders of Notes. No representation is made as to the accuracy of such numbers
either as printed on the Notes or as contained in any notice of redemption and
reliance may be placed only on the other identification numbers placed thereon.
A-8
<PAGE>
The Obligors will furnish to any holder of a Note upon written
request and without charge a copy of the Indenture. Request may be made to:
MGC Communications, Inc.
Mpower Holding Corporation
171 Sully's Trail
Suite 202
Pittsford, New York 14534
Attention: General Counsel
A-9
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and
transfer this Note to
________________________________________________________________________________
(Insert assignee's soc. sec. or tax I.D. no.)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type assignee's name, address and zip code)
and irrevocably appoint_________________________________________________________
agent to transfer this Note on the books of the Company. The agent may
substitute another to act for him.
________________________________________________________________________________
Date: ______________
Your Signature:__________________________
(Sign exactly as your name appears on the
face of this Note)
Signature Guarantee.
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have all or any part of this Note purchased by
the Company pursuant to Section 3.09 or Section 4.15 of the Indenture check the
appropriate box:
|_| Section 3.09 |_| Section 4.15
If you want to have only part of the Note purchased by the Company
pursuant to Section 3.09 or Section 4.15 of the Indenture, state the amount you
elect to have purchased:
$________________
Date:____________
Your Signature:______________________
(Sign exactly as your name appears on
the face of this Note)
Signature Guarantee.
<PAGE>
SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL SECURITY
The following exchanges of a part of this Global Security have
been made:
<TABLE>
<CAPTION>
Principal Amount of Signature of
Amount of decrease in Amount of increase in this Global authorized officer of
Principal Amount of Principal Amount of following such decrease Trustee or Note
Date of Exchange this Global Security this Global Security (or increase) Custodian
- ---------------------- ------------------------ ------------------------ ------------------------ ---------------------
<S> <C> <C> <C> <C>
</TABLE>
<PAGE>
EXHIBIT B
FORM OF CERTIFICATE OF TRANSFER
MGC Communications, Inc.
Mpower Holding Corporation
171 Sully's Trail
Suite 202
Pittsford, New York 14534
Attention: General Counsel
HSBC Bank USA
140 Broadway
12th Floor
New York, New York 10005
Attention: Issuer Services
Re: 13% Senior Notes due 2010
-------------------------
Reference is hereby made to the Indenture, dated as of March 24, 2000
(the "Indenture"), between MGC Communications, Inc., as issuer ("MGC"), Mpower
Holding Corporation, as issuer ("Mpower"), and HSBC Bank USA, as trustee.
Capitalized terms used but not defined herein shall have the meanings given to
them in the Indenture.
______________, (the "Transferor") owns and proposes to transfer the
Note[s] or interest in such Note[s] specified in Annex A hereto, in the
principal amount of $___________ (the "Transfer"), to __________ (the
"Transferee"), as further specified in Annex A hereto. In connection with the
Transfer, the Transferor hereby certifies that:
[CHECK ALL THAT APPLY]
1. |_| Check if Transferee will take delivery of Book-Entry Interests in the
Global Security or Certificated Securities Pursuant to Rule 144A. The Transfer
is being effected pursuant to and in accordance with Rule 144A under the United
States Securities Act of 1933, as amended (the "Securities Act"), and,
accordingly, the Transferor hereby further certifies that the Book-Entry
Interests or Certificated Securities are being transferred to a Person that the
Transferor reasonably believes is purchasing the Book- Entry Interests or
Certificated Securities for its own account, or for one or more accounts with
respect to which such Person exercises sole investment discretion, and such
Person and each such account is a "qualified institutional buyer" within the
meaning of Rule 144A in a transaction meeting the requirements of Rule 144A and
such Transfer is in compliance with any applicable blue sky securities laws of
any state of the United States. Upon consummation of the proposed Transfer in
accordance with the terms of the Indenture, the transferred Book-Entry Interest
or Certificated Security will be subject to the restrictions on transfer
enumerated in the Private Placement Legend printed on the Global Security and/or
the Certificated Security and in the Indenture and the Securities Act.
2. |_| Check and complete if Transferee will take delivery of Book-Entry
Interests in the Global Security or Certificated Securities pursuant to any
provision of the Securities Act other than Rule 144A. The Transfer is being
effected in compliance with the transfer restrictions applicable to Book-Entry
Interests in the Restricted Global Security and Restricted Certificated
Securities and pursuant to and in
<PAGE>
accordance with the Securities Act and any applicable blue sky securities laws
of any State of the United States, and accordingly the Transferor hereby further
certifies that (check one):
(a) |_| such Transfer is being effected to the Company or a subsidiary
thereof,
or
(b) |_| such Transfer is being effected pursuant to an effective
registration statement under the Securities Act;
or
(c) |_| such Transfer is being effected pursuant to an exemption from the
registration requirements of the Securities Act other than Rule 144A, and the
Transferor hereby further certifies that the Transfer complies with the transfer
restrictions applicable to Book-Entry Interests in a Restricted Global Security
or Restricted Certificated Securities and the requirements of the exemption
claimed, which certification is supported by (1) if the transfer is being made
to an Institutional Accredited Investor and effected pursuant to an exemption
from the registration requirements of the Securities Act other than Rule 144A
under the Securities Act, Rule 144 under the Securities Act or Rule 904 under
the Securities Act, a certificate executed by the Transferee in the form of
Exhibit D to the Indenture and (2) an Opinion of Counsel provided by the
Transferor or the Transferee (a copy of which the Transferor has attached to
this certification), to the effect that (1) such Transfer is in compliance with
the Securities Act and (2) such Transfer complies with any applicable blue sky
securities laws of any state of the United States. Upon consummation of the
proposed transfer in accordance with the terms of the Indenture, the transferred
Book-Entry Interest or Certificated Security will be subject to the restrictions
on transfer enumerated in the Private Placement Legend printed on the Restricted
Global Security and/or the Restricted Certificated Securities and in the
Indenture and the Securities Act.
3. |_| Check if Transferee will take delivery of Book-Entry Interests in the
Unrestricted Global Security or in Certificated Securities that do not bear the
Private Placement Legend. (i) The Transfer is being effected pursuant to and in
compliance with an exemption from the registration requirements of the
Securities Act and in compliance with the transfer restrictions contained in the
Indenture and any applicable blue sky securities laws of any State of the United
States and (ii) the restrictions on transfer contained in the Indenture and the
Private Placement Legend are not required in order to maintain compliance with
the Securities Act. Upon consummation of the proposed Transfer in accordance
with the terms of the Indenture, the transferred Book-Entry Interests or
Certificated Securities will not be subject to the restrictions on transfer
enumerated in the Private Placement Legend printed on the Restricted Global
Security or Restricted Certificated Securities bearing the Private Placement
Legend and in the Indenture.
This certificate and the statements contained herein are made for
your benefit.
____________________
[NAME OF TRANSFEROR]
By:_________________
Name:
Title:
Dated: __________________, ___
B-2
<PAGE>
ANNEX A TO CERTIFICATE OF TRANSFER
1. The Transferor owns and proposes to transfer the following:
[CHECK ONE OF (a) OR (b)]
(a) |_| Book-Entry Interests in the Global Security:
(i) |_| 144A Global Security (CUSIP _________), or
(ii) |_| Regulation S Global Security (CUSIP ________), or
(ii) |_| IAI Global Security (CUSIP ________); or
(b) |_| Restricted Certificated Securities.
2. After the Transfer the Transferee will hold:
[CHECK ONE]
(a) |_| Book-Entry Interests in the:
(i) |_| 144A Global Security (CUSIP _________), or
(ii) |_| Regulation S Global Security (CUSIP________), or
(iii) |_| IAI Global Security (CUSIP ________); or
(iv) |_| Unrestricted Global Security (CUSIP ________); or
(b) |_| Restricted Certificated Securities; or
(c) |_| Certificated Securities that do not bear the Private Placement
Legend,
in accordance with the terms of the Indenture.
B-3
<PAGE>
EXHIBIT C
FORM OF CERTIFICATE OF EXCHANGE
MGC Communications, Inc.
Mpower Holding Corporation
171 Sully's Trail
Suite 202
Pittsford, New York 14534
Attention: General Counsel
HSBC Bank USA
140 Broadway
12th Floor
New York, New York 10005
Attention: Issuer Services
Re: 13% Senior Notes due 2010
-------------------------
(CUSIP ________)
Reference is hereby made to the Indenture, dated as of March
24, 2000 (the "Indenture"), between MGC Communications, Inc., as issuer ("MGC"),
Mpower Holding Corporation, as issuer ("Mpower"), and HSBC Bank USA, as trustee.
Capitalized terms used but not defined herein shall have the meanings given to
them in the Indenture.
_________, (the "Holder") owns and proposes to exchange the Note[s] or
interest in such Note[s] specified herein, in the principal amount of
$____________ (the "Exchange"). In connection with the Exchange, the Holder
hereby certifies that:
1. Exchange of Restricted Certificated Securities or Restricted Book-Entry
Interests for Certificated Securities that do not bear the Private Placement
Legend or Unrestricted Book-Entry Interests
(a) |_| Check if Exchange is from Restricted Book-Entry Interest to
Unrestricted Book-Entry Interest. In connection with the Exchange of the
Holder's Restricted Book-Entry Interest for Unrestricted Book-Entry Interests in
an equal principal amount, the Holder hereby certifies (i) the Unrestricted
Book-Entry Interests are being acquired for the Holder's own account without
transfer, (ii) such Exchange has been effected in compliance with the transfer
restrictions applicable to the Global Security and pursuant to and in accordance
with the United States Securities Act of 1933, as amended (the "Securities
Act"), (iii) the restrictions on transfer contained in the Indenture and the
Private Placement Legend are not required in order to maintain compliance with
the Securities Act and (iv) the Unrestricted Book-Entry Interests are being
acquired in compliance with any applicable blue sky securities laws of any state
of the United States.
(b) |_| Check if Exchange is from Restricted Book-Entry Interest to
Certificated Securities that do not bear the Private Placement Legend. In
connection with the Exchange of the Holder's Restricted Book-Entry Interests for
Certificated Securities that do not bear the Private Placement Legend, the
Holder hereby certifies (i) the Certificated Securities are being acquired for
the Holder's own
C-1
<PAGE>
account without transfer, (ii) such Exchange has been effected in compliance
with the transfer restrictions applicable to the Restricted Global Security and
pursuant to and in accordance with the Securities Act, (iii) the restrictions on
transfer contained in the Indenture and the Private Placement Legend are not
required in order to maintain compliance with the Securities Act and (iv) the
Certificated Securities are being acquired in compliance with any applicable
blue sky securities laws of any state of the United States.
(c) |_| Check if Exchange is from Restricted Certificated Securities to
Unrestricted Book-Entry Interests. In connection with the Holder's Exchange of
Restricted Certificated Securities for Unrestricted Book-Entry Interests, (i)
the Unrestricted Book-Entry Interests are being acquired for the Holder's own
account without transfer, (ii) such Exchange has been effected in compliance
with the transfer restrictions applicable to Restricted Certificated Securities
and pursuant to and in accordance with the Securities Act, (iii) the
restrictions on transfer contained in the Indenture and the Private Placement
Legend are not required in order to maintain compliance with the Securities Act
and (iv) the Unrestricted Book-Entry Interests are being acquired in compliance
with any applicable blue sky securities laws of any state of the United States.
(d) |_| Check if Exchange is from Restricted Certificated Securities to
Certificated Securities that do not bear the Private Placement Legend. In
connection with the Holder's Exchange of a Restricted Certificated Security for
Certificated Securities that do not bear the Private Placement Legend, the
Holder hereby certifies (i) the Certificated Securities that do not bear the
Private Placement Legend are being acquired for the Holder's own account without
transfer, (ii) such Exchange has been effected in compliance with the transfer
restrictions applicable to Restricted Certificated Securities and pursuant to
and in accordance with the Securities Act , (iii) the restrictions on transfer
contained in the Indenture and the Private Placement Legend are not required in
order to maintain compliance with the Securities Act and (iv) the Notes are
being acquired in compliance with any applicable blue sky securities laws of any
state of the United States.
2. Exchange of Restricted Certificated Securities or Restricted Book-Entry
Interests for Restricted Certificated Securities or Restricted Book-Entry
Interests
(a) |_| Check if Exchange is from Restricted Book-Entry Interests to
Restricted Certificated Security. In connection with the Exchange of the
Holder's Restricted Book-Entry Interest for Restricted Certificated Securities
with an equal principal amount, (i) the Restricted Certificated Securities are
being acquired for the Holder's own account without transfer and (ii) such
Exchange has been effected in compliance with the transfer restrictions
applicable to the Restricted Global Security and pursuant to and in accordance
with the Securities Act, and in compliance with any applicable blue sky
securities laws of any state of the United States. Upon consummation of the
proposed Exchange in accordance with the terms of the Indenture, the Restricted
Certificated Securities issued will be subject to the restrictions on transfer
enumerated in the Private Placement Legend printed on the Restricted
Certificated Securities and in the Indenture and the Securities Act.
(b) |_| Check if Exchange is from Restricted Certificated Securities to
Restricted Book-Entry Interests. In connection with the Exchange of the Holder's
Restricted Certificated Security for Restricted Book-Entry Interests in the
[CHECK ONE] o 144A Global Security, o Regulation S Global Security, o IAI Global
Security with an equal principal amount, (i) the Certificated Securities are
being acquired for the Holder's own account without transfer and (ii) such
Exchange has been effected in compliance with the transfer restrictions
applicable to the Restricted Certificated Security and pursuant to and in
accordance with the Securities Act, and in compliance with any applicable blue
sky securities laws of any state of the United States. Upon consummation of the
proposed Exchange in accordance with the terms of the Indenture, the Book-Entry
Interests issued will be subject to the restrictions on transfer
C-2
<PAGE>
enumerated in the Private Placement Legend printed on the relevant Restricted
Global Security and in the Indenture and the Securities Act.
This certificate and the statements contained herein are made
for your benefit.
_________________________
[Insert Name of Holder]
By: _____________________
Name:
Title:
Dated: _________________, ____
C-3
<PAGE>
EXHIBIT D
FORM OF CERTIFICATE FROM
ACQUIRING INSTITUTIONAL ACCREDITED INVESTOR
MGC Communications, Inc.
Mpower Holding Corporation
171 Sully's Trail
Suite 202
Pittsford, New York 14534
Attention: General Counsel
HSBC Bank USA
140 Broadway
12th Floor
New York, New York 10005
Attention: Issuer Services
Re: 13% Senior Notes due 2010
-------------------------
Reference is hereby made to the Indenture, dated as of March
24, 2000 (the "Indenture"), between MGC Communications, Inc., as issuer ("MGC"),
Mpower Holding Corporation, as issuer ("Mpower"), and HSBC Bank USA, as trustee.
Capitalized terms used but not defined herein shall have the meanings given to
them in the Indenture.
In connection with our proposed purchase of $____________
aggregate principal amount of Notes, we confirm that:
1. We understand that any subsequent transfer of the Notes or
any interest therein is subject to certain restrictions and conditions set forth
in the Indenture and the undersigned agrees to be bound by, and not to resell,
pledge or otherwise transfer the Notes or any interest therein except in
compliance with, such restrictions and conditions and the Securities Act of
1933, as amended (the "Securities Act").
2. We understand that the offer and sale of the Notes have not
been registered under the Securities Act, and that the Notes and any interest
therein may not be offered or sold except as permitted in the following
sentence. We agree, on our own behalf and on behalf of any accounts for which we
are acting as hereinafter stated, that if we should sell the Notes or any
interest therein, we will do so only (A)(1) to a person who we reasonably
believe is a qualified institutional buyer (as defined in Rule 144A under the
Securities Act) in a transaction meeting the requirements of Rule 144A, (2) in a
transaction meeting the requirements of Rule 144 under the Securities Act, (3)
outside the United States to a person that is not a U.S. person (as defined in
Rule 902 under the Securities Act) in a transaction meeting the requirements of
Rule 904 under the Securities Act, (4) to an institutional "accredited investor"
(as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the
Securities Act) that, prior to such transfer, furnishes to you a signed letter
containing certain representations and agreements relating to the Notes, or (5)
in accordance with another exemption from the registration requirements of the
Securities Act (in the case of 2, 3, 4 or 5, based upon an opinion of counsel if
the Obligors or the Trustee so requests), (B) to the Obligors or (C) pursuant to
an effective registration statement and, in each case, in accordance with any
applicable securities laws of any state of the United States or any other
applicable jurisdiction, and we
D-1
<PAGE>
further agree to provide to any person purchasing the Certificated Securities or
interests therein from us in a transaction meeting the requirements of clauses
(A) through (C) of this paragraph a notice advising such purchaser that resales
thereof are restricted as stated herein.
3. We understand that, on any proposed resale of the Notes or
any interests therein, we will be required to furnish to you and the Obligors
such certifications, legal opinions and other information as you and the
Obligors may reasonably require to confirm that the proposed sale complies with
the foregoing restrictions. We further understand that the Notes purchased by us
will bear a legend to the foregoing effect. We further understand that any
subsequent transfer by us of the Notes or interests therein acquired by us must
be effected through one of the Initial Purchasers.
4. We are an institutional "accredited investor" (as defined
in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and
have such knowledge and experience in financial and business matters as to be
capable of evaluating the merits and risks of our investment in the Notes, and
we and any accounts for which we are acting are each able to bear the economic
risk of our or its investment.
5. We are acquiring the Notes or interests therein for our own
account or for one or more accounts (each of which is an institutional
"accredited investor") as to each of which we exercise sole investment
discretion.
You and the Obligors are entitled to rely upon this letter and
are irrevocably authorized to produce this letter or a copy hereof to any
interested party in any administrative or legal proceedings or official inquiry
with respect to the matters covered hereby.
____________________________________
[Insert Name of Accredited Investor]
By:_________________________________
Name:
Title:
Dated: _________________, ______
D-2
Exhibit 23.1
<PAGE>
Exhibit 23.1
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the
incorporation by reference in this Proxy Statement/Prospectus of our reports
dated February 16, 2000 included in MGC Communications, Inc.'s Current Report on
Form 8-K filed on March 13, 2000 and Form 10-K for the year ended December 31,
1999, and to all references to our Firm included in or made a part of this Proxy
Statement/Prospectus.
/s/ Arthur Andersen LLP
------------------------
ARTHUR ANDERSEN LLP
Las Vegas
May 4, 2000
Exhibit 23.2
<PAGE>
Exhibit 23.2
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated March 22, 1999 and November 19, 1999, with respect to
the financial statements of CDM On-Line, Inc. (predecessor), and to the use of
our report dated February 11, 2000 (except Note 16, as to which the date is
April 27, 2000), with respect to the consolidated financial statements of
Primary Network Holdings, Inc. (successor), included in the Proxy Statement of
MGC Communications, Inc. that is made a part of the Registration Statement (Form
S-4 No. 333-______) and Prospectus of MGC Communications, Inc. for the
registration of 1,400,000 shares of its common stock.
/s/Ernst & Young LLP
--------------------
St. Louis, Missouri
May 4, 2000
Exhibit 23.6
<PAGE>
Exhibit 23.6
CONSENT OF HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
(Letterhead of Houlihan Lokey Howard & Zukin)
May 9, 2000
The Board of Directors
Primary Network Holdings, Inc.
c/o Alan Schrager
Chief Financial Officer
Primary Network Holdings, Inc.
11756 Borman Dr.
St. Louis, MO 63146
Re: Consent of Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
To The Board of Directors:
Pursuant to the engagement letter between Houlihan Lokey Howard & Zukin
("Houlihan Lokey") and Primary Network Holdings, Inc. (the "Company"), dated
March 2, 2000 ("Retainer"), the Company is required to get our consent prior to
the distribution of our opinion letter, dated April 19, 2000 ("Opinion Letter")
beyond what was stipulated in the Retainer. Houlihan Lokey hereby consents to
the inclusion of its Opinion Letter in the proxy material related to the Primary
Network/Mpower Communications Corp. transaction. In giving such consent, we do
not admit that we come within the category of persons whose consent, we do not
admit that we come within the category of persons whose consent is required
under, nor do we admit that we are "experts" for purposes of, the Securities Act
of 1933, as amended, and the rules and regulations promulgated thereunder.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
By: /s/: Marjorie L. Bowen
-----------------------
Marjorie L. Bowen
Managing Director
Exhibit 99.3
<PAGE>
Exhibit 99.3
LETTER TO PRIMARY NETWORK STOCKHOLDERS
PROXY STATEMENT/PROSPECTUS DATED _____, 2000
______, 2000
Dear Fellow Stockholders:
You are cordially invited to attend a special meeting of the
stockholders of Primary Network Holdings, Inc., which is referred to as Primary
Network, which we will hold at _____ a.m., local time, on ____, 2000, at
________.
At the special meeting, we will ask you to approve the merger of
Primary Network with Mpower Communications Corp. (a/k/a MGC Communications,
Inc.), which is referred to as Mpower. Mpower common stock is quoted on NASDAQ
under the trading symbol "MPWR." On ____, 2000, Mpower common stock closed at
$___ per share. After the proposed merger, Primary Network will be a wholly
owned subsidiary of Mpower, and you will be a stockholder of Mpower. In the
merger, each outstanding share of common stock and outstanding each share of
Primary Networks preferred stock will be converted into 0.02022 shares of Mpower
common stock. For any resulting fractional share, a shareholder will receive
cash in an amount equal to the market value of the fractional share.
A total of 1,350,000 shares of Mpower common stock will be issued to
Primary Network stockholders in connection with the merger. After the merger,
the current Primary Network common and preferred stockholders will own
approximately 3.1% and the current Mpower common stockholders will own
approximately 96.9% of the outstanding shares of common stock of the combined
company. After the completion of the merger, Mpower intends to launch an
exchange offer where holders of the Primary Network 12% Senior Subordinated
Discount Notes will be able to exchange their Primary Network notes for Mpower
notes. Should a holder of these Primary Network notes not wish to exchange them
for Mpower notes, Mpower will offer to repurchase the Primary Network notes in
accordance with their terms.
Your board of directors has determined that the merger is consistent
with, and advances, the long-term business strategy of Primary Network and
recommends that you vote in favor of the merger at the special meeting. The
merger cannot be completed unless a majority of the holders of voting stock of
Primary Network vote to approve it. Brian Matthews, Carol Matthews, Charles
Wiegert, Welton Brison, Tom Hesterman, Richard Phillips, John Alden, EC Primary
LLC, Quantum Emerging Growth Partners, C.V. and TGV Partners, which together
hold approximately 73% of Primary Network common stock, have agreed to vote in
favor of the merger and have granted irrevocable proxies to Mpower to enforce
such voting agreement.
<PAGE>
The attached Joint Proxy Statement/Prospectus provides you with
detailed information about Mpower and the proposed merger. You should read this
document, particularly the section describing risk factors relating to the
merger. After careful consideration, your board of directors has by unanimous
vote of all directors participating approved the merger and determined to
recommend that you vote in favor of the merger. We look forward to the
successful combination of Primary Network and Mpower and to your continued
support as a stockholder of the combined company.
For a discussion of the risk factors which you should consider in
evaluating the merger, see "Risk Factors" beginning on page 16.
FOR YOUR VOTE TO BE COUNTED, IT IS IMPORTANT THAT YOU SIGN AND RETURN
THE PROXY CARD CONTAINED HEREIN.
Sincerely,
/s/ Brian Matthews
----------------------------------
Brian Matthews
Chairman of the Board of Directors
Neither the Securities and Exchange Commission nor any state securities
commission has approved the Mpower common stock to be issued in the merger or
determined whether this Joint Proxy Statement/Prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
This Joint Proxy Statement/Prospectus is dated ______, 2000 and is
first being mailed to stockholders on or about _____, 2000.
Exhibit 99.4
<PAGE>
Exhibit 99.4
PRIMARY NETWORK HOLDINGS, INC.
11756 BORMAN DRIVE
ST. LOUIS, MISSOURI 63146
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To the stockholders of Primary Network Holdings, Inc:
A special meeting of the holders of common stock of Primary Network
Holdings, Inc., which is referred to as Primary Network, will be held at ____
a.m. local time, on ________, 2000, at __________________________, to consider
and vote on a proposal to approve an agreement and plan of merger dated as of
April 17, 2000 among Primary Network Holdings, Inc., Mpower Communications Corp.
(a/k/a MGC Communications, Inc.), which is referred to as Mpower, and Mpower
Merger Sub, Inc., a wholly owned subsidiary of Mpower, and to approve the merger
and other transactions described in the merger agreement.
The only purpose of this meeting is to discuss and vote on whether to
authorize the merger of Primary Network with Mpower. We will transact no other
business at the special meeting, except for business properly brought before the
special meeting or any adjournment or postponement of the special meeting by the
Primary Network board of directors.
Your board of directors has determined that the merger is consistent
with, and advances, the long-term business strategy of Primary Network and
recommends that you vote in favor of the merger at the special meeting. The
merger cannot be completed unless a majority of the stockholders of Primary
Network vote to approve it. Brian Matthews, Carol Matthews, Charles Wiegart,
Welton Brison, Tom Hesterman, Richard Phillips, John Alden, EC Primary LLC,
Quantum Emerging Growth Partners, C.V. and TGV Partners, together holders of
approximately 73% of the shares of Primary Network common stock outstanding,
have agreed to vote in favor of the merger and have granted irrevocable proxies
to Mpower to enforce such voting agreement.
The close of business on _______, 2000 is the record date for
determining which holders of common stock are entitled to vote at the meeting
and at any adjournment or postponement of the meeting. A list of stockholders
entitled to vote at the meeting will be available for your examination at
Primary Network's headquarters for a period of ten days before the meeting
during regular business hours.
PLEASE READ THE ACCOMPANYING JOINT PROXY STATEMENT/PROSPECTUS AND THE
MERGER AGREEMENT ATTACHED AS APPENDIX I FOR INFORMATION RELATING TO PRIMARY
NETWORK, MPOWER AND THE TERMS AND CONDITIONS OF THE MERGER, AS WELL AS APPENDIX
II SETTING FORTH YOUR RIGHTS TO DISSENT FROM THE MERGER. OTHER IMPORTANT
INFORMATION IS INCORPORATED BY REFERENCE FROM OTHER
<PAGE>
DOCUMENTS. IN ORDER TO OBTAIN A COPY OF THE DOCUMENTS CONTAINING INFORMATION
INCORPORATED BY REFERENCE, YOU MUST REQUEST THE INFORMATION NO LATER THAN FIVE
BUSINESS DAYS BEFORE THE DATE OF THE STOCKHOLDER MEETING. PLEASE REVIEW ALL
THESE MATERIALS BEFORE COMPLETING THE ENCLOSED PROXY CARD.
By order of the Board of Directors,
/s/ Brian Matthews
------------------------------------
Brian Matthews
Chairman of the Board of Directors
To assure your representation at the special meeting, please complete,
sign, date and return the enclosed proxy card promptly in the enclosed
self-addressed envelope, stamped envelope or via facsimile (314) 692-3587, attn.
Amy Schroeder. In the event that you deliver the proxy card via facsimile,
please call Amy Schroeder prior to sending at (314) 214-0076. The delivery of
the proxy will not effect your right to attend the meeting, or, if you choose to
revoke the proxy, your right to vote in person. Please do not send in your stock
certificates with your proxy card.
